'Without Education, Our Nation Is Nothing'

Last night Stanley Fischer flew to the International Monetary Fund conference in an optimistic mood. Barring a major shock, the Bank of Israel that he heads should be able to meet its inflation target for the year without raising interest rates any more this year, he says in conversation (in Hebrew) with TheMarker. "However, taxes are too high, investment in education is too low, and Yaron Zelekha is just getting in everybody's way," he says, that last referring to the Finance Ministry's combative accountant-general, a valiant warrior against corruption whose abrasive ways have aroused opposition throughout the nation's financial leadership.

It isn't every day that a central bank governor from a tiny country wins an honor like this. Just before his flight to Washington, Fischer was named one of the seven most prominent central bankers in the world by Global Finance, which gave him an A for his success in helping Israel's economy overcome the aftermath of the Second Lebanon War, and for his skill in keeping inflation low despite the instability of the government.

Finance Minister Roni Bar-On didn't miss the opportunity to say a kind word: "Fischer's high ranking adds to the prestige of Israel's economy." Of course, the governor and finance minister have always maintained cordial relations: they meet to discuss economic issues every fortnight. Bar-On sees Fischer as an excellent teacher of economics and they also talk on the phone between meetings. Ahead of the flight, they met at a Tel Aviv cafe to discuss the meetings they'll be having in Washington, because Bar-On is coming, too.

Fischer feels at home in IMF circles, having served as its first deputy managing director from September 1994 to August 2001. Tomorrow he'll be hosting a seminar on the world economy, and next week he'll be addressing the IMF plenum on behalf of the State of Israel.

Fischer says he agrees that the problem with Yaron Zelekha is a knotty one.

Should Zelekha be forced out after his four-year contract ends?

"That depends on the law," he answers. "The state comptroller gave Zelekha protection, but the implications for the economy are very hard. The team that manages the economy, the top treasury people, isn't working as a team. There is no cooperation between Zelekha and the treasury officials, and they say he should go. So there's a problem."

People who set out to fix the world aren't fun to work with. But they do clean out stables.

"Sometimes that's true, but meanwhile there's an economy to run."

Do you think Zelekha should leave?

"It is the employer's right to decide with whom to work. If the finance minister can't work with him, and the finance minister is the one responsible for the system under the law, he should go."

Zelekha says Olmert will be going to jail over the Bank Leumi affair.

"I can't comment on what Zelekha says. I know that regarding the part of the Bank Leumi case in which I was involved, there were professional differences of opinion, no more."

Olmert is being questioned in four affairs and an indictment will be served against the former finance minister, Avraham Hirchson. Are we a corrupt nation?

"I don't think we're particularly corrupt. A lot of investigations begin but there aren't a lot of convictions. We hasten to accuse... We make a lot of noise about corruption, but the situation isn't that bad."

The police and prosecution act too hastily?


Apropos of corruption, what about wage levels and perks, some based on fictitious reasons, at the Bank of Israel? Isn't that corruption?

"I think the problem lies in the way wages are determined. A lot of people at the Bank of Israel needed to be paid relatively high salaries, for instance the supervisor of banks, or the people who manage the state's assets. There's a lot of competition over them in the private sector. But, in Israel, instead of saying that somebody deserves high pay, they look for ways to pad the wage, car costs and so on, and then call it corruption. I think they should be paid high salaries directly...The fact is that even now we lose good people every day."

Moving on, is the subprime crisis behind us?

"That's an open question. Central banks are handling the crisis through monetary policy, but they can't prevent a certain slowdown in global economic growth because of what happened in the housing market. We can't know yet how deep the blow goes. During the first two weeks of the crisis, I was afraid that the central banks would be afraid to intervene, but when they started to, I knew the crisis would be contained."

Back to Israel. You promised to force the banks to lower their number of fees from 350 to 85 and to bring some under regulation. It doesn't seem to be progressing as promised.

"It's progressing in the right direction. We shall reduce the number of fees and bring some under supervision, when the customer is captive, like in the fee for changing bankers."

For the sake of widening competition in Israel's insular banking sector, would you want a foreign bank to buy Leumi?

"Yes. We'd give priority to a foreign bank. We want change in the way customers are treated. Our banks are not backward in technology or customer service but we need a foreign element with fresh thinking...I also support bringing in an Internet bank and turning the Postal Bank into a commercial one."

Given our budget surpluses, should we continue to lower taxes after 2010?

"There's a dispute over whether Israeli tax levels or high or not. It depends to whom you compare. I think taxes are too high and we should continue to lower them gradually after 2010. But we shouldn't overdo it: We have to leave room for government spending to increase.

"We are backward in higher education. We don't pay top researchers enough...Our higher education system is still very good, but it has to be preserved. Without higher education, without technological ability, our nation is nothing. We know that but have to invest in it, too."

Some say the rating agencies exacerbated the subprime crisis.

"It's true, there's a problem. The credit rating agencies contributed to the crisis in the subprime and securitization market because of the way they evaluated the mortgage banks. These banks securitized mortgages. The agencies divided these assets into groups and rated them by a strange key. Some received excessive ratings of AAA. But they were motivated to give high ratings, because the banks paid them for the rating. There was a conflict of interest that needs handling."