Pump money, Treasury

Nobody right now relishes jeopardizing assets. Consequently the economy fares worse because of the unavailability of money; it's now up to the Treasury to break that cycle.

By
January 28, 2009 11:20
2 minute read.
Pump money, Treasury

money 88. (photo credit: Courtesy)

Statistics and grim forecasts made it official, though Israelis realized it on their own: Recession hovers. Monday's prognostication by Bank of Israel Governor Prof. Stanley Fischer substantiated what was fast becoming self-evident. The remedy prescribed by Fischer - a further 0.75% reduction of interest-rates to 1%, a record low for this country - was anticipated. Presumably there's room for yet more cuts, although near interest-rate parity with America is fraught with danger. It might trigger an outflow of money abroad, especially of funds deposited by non-Israelis. Eventually this could weaken the shekel beyond what is desirable for export-stimulus. If we are revisited by inflation/stagflation, the BOI will find it harder to control exchange rates. Beyond slashing interest rates, there's little the BOI can do on its own. The rest is up to the Treasury, which thus far has seemed in denial. Fischer's projection is that our economy will shrink by 0.2%. Indeed it was already contracting in the final months of 2008. And, as if to underpin Fischer's assessments, 17,500 workers joined the jobless rolls in December. The ranks of the unemployed are likely to continue to swell. Lost earnings restrict demand, thereby exacerbating the economic slowdown. The objective of acute interest-rate decreases is to generate growth by increasing liquidity; to keep viable enterprises from going under due to short-term cash-starvation. The assumption is that banks should charge less interest when money effectively costs them less. In reality, the disparity between the BOI's diminished rate and what commercial banks demand from their clients has broadened. Loans haven't become more affordable. If businesses waste away for lack of credit, the upshot will be greater unemployment, more severely falling demand, more bankruptcies and more panic in financial markets. But while commercial banks have fully earned Fischer's rebuke, there's more to their conduct than greed. They are no less susceptible to risk-aversion than any other sector. Lending at unstable times isn't done lightly. Nobody right now relishes jeopardizing assets. Consequently the economy fares worse because of the unavailability of money, which in turn exacerbates the crisis of confidence and takes still more funds out of circulation. It's now up to the Treasury to break that cycle, and it cannot dither until after the elections and the formation of a new government. The banks need convincing guarantees, and the government must overcome its inhibitions, get proactive, involve itself in the markets and transfuse considerably more funds into the economy, just like other governments have done in these difficult days.


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