The Buck Stops... Where?

By SHLOMO MAITAL
The story is told of the famed Rabbi Israel Salanter, founder of the Musar (ethics) movement. His congregation was afflicted by a cholera epidemic. Fearing that a Yom Kippur fast would seriously weaken his congregants and endanger their lives, he stood on the pulpit before Kol Nidrei, urged his congregants to eat - and himself tearfully ate a meal. I was reminded of this story by events unfolding on Thursday and Friday, March 13 and 14. The price of the U.S. dollar in Israeli shekels dropped like a stone, as a "sellers only" market in dollars developed. At 3.40 shekels per dollar, dollars had not been that cheap since April 1997. Why did this occur? Perhaps, the stunning news that America's fifth largest investment bank, Bear, Stearns was bankrupt and the realization by wealthy Israelis with dollar holdings that the dollar was going to continue its slide. Bank of Israel Governor Stanley Fischer ordered the Bank to halt the dollar's slide vis-ˆ-vis the shekel by massive purchases of dollars - according to press reports, buying as many as $600 m. Fischer had repeatedly said the Bank of Israel would not intervene to halt the rise of the shekel in terms of dollars. Yet like Rabbi Salanter, when matters were desperate, when it came down to pikuah nefesh (saving lives), Fischer bent his principles. Otherwise, the dollar could have dropped to as little as 3.25 shekels, ruinous for Israel's export-driven economy. Days before the dollar's collapse, the Polgat-Bagir textile plant in Kiryat Gat closed its doors, throwing 300 workers out of a job. When sales revenue is in dollars and wages are paid in shekels, losses mount. This is happening to many Israeli companies that sell to America. In the 12 months up to March 14, the price of dollars in terms of shekels fell by 20 percent. This fall in the dollar-shekel exchange rate was greater than for any other major currency - the yen, yuan, euro, pound sterling, Canadian dollar or Swiss franc. Some see the dark hand of international currency speculators' involvement, perhaps like what George Soros did to the British pound in 1992. David Ben Artzi, Chair of the Israel Export Institute, says 71 percent of foreign currency trading in Israel is "speculative." But all that is needed for the dollar to crash relative to the shekel is for importers to delay buying dollars, and exporters to accelerate selling them, by a few days or weeks. That is likely what happened last Thursday. The long, deep slide of the dollar is far from amusing. But, nonetheless, seeing "Rabbi" Fischer buying dollars is rich in irony. Fischer spent seven eventful years as the world's "fireman," the International Monetary Fund's First Deputy Director, bailing out countries like Thailand, Indonesia and Russia, whose currencies were collapsing. He now faces a crisis caused not by a collapsing currency but by a soaring one. Fischer called a press conference to explain his actions. "We are seeing a foreign currency that is not anchored and we started to witness patterns of herd mentality," he said. (Herd mentality means, in polite language, that someone in the foreign exchange market yelled "fire" and everyone ran and dumped dollars). "Based on that, we decided to intervene ... This is not an emergency situation, it is a unique situation." Who are the losers from the soaring shekel? For a start, Israel's government. America's annual $3 b. in aid to Israel is now worth a fifth less in shekels than a year ago; and Israel's exporters, who last year sold 38 percent ($17.8 b.) of all their exports to America; my synagogue, Moriah, and many other synagogues and numerous non-governmental organizations like the Joint Distribution Committee, which receive dollar contributions and find their budgets have enormous 20 percent deficits as a result of the dollar's fall; and those with dollar investments abroad, and many thousands of Americans who live on social security, pensions and other dollar incomes, in Israel. Who are the winners? All those Israelis now piling onto planes to America and enjoying the cheap dollar and lower air fares; Israelis who buy imported goods and services from America; those whose house purchases or rental contracts were linked to the dollar (a practice the dollar's collapse has nearly ended). On balance, though, Israel loses. Treasury Director General Yarom Ariav now says Israel's economic growth will slow a lot in 2008. Some of us recall what U.S. Secretary of the Treasury John Connolly said in 1971: "The dollar is our currency, and your [the world's] problem." Not any longer, John. The sliding dollar is nearly everyone's problem. We all would like to know when and where the buck will stop. The writer is the academic director of the Technion Institute of Management, Tel Aviv.