Reality Check: Stan’s the Man

Bank of Israel Governor Stanley Fischer’s call to restrain executive salaries will undoubtedly prove unpopular with the tycoons, but he calls it as he sees it. Let’s hope Netanyahu comes on board.

By
April 26, 2010 09:20
4 minute read.
Bank of Israel Governor Stanley Fischer

stanley fischer 311. (photo credit: Courtesy)

Few Anglo immigrants have made as telling an impact on Israel as Bank of Israel Governor Stanley Fischer. He has proved that one does not have to be “one of the boys,” well-connected to the country’s business and political elites, to succeed as its most senior economic official.

In fact, his outsider status, alongside his undoubted intellectual ability, was probably the most important attribute he brought with him when he swapped his well-paying vice chairmanship at Citigroup for the less financially rewarding position of Israel’s central bank governor.

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Fischer is beholden to nobody. He was first appointed as Bank of Israel governor in 2005 solely because of his reputation as a world-leading economist. His recent reappointment for a second term in the governor’s chair was again free from any political jiggery-pokery or business-interest lobbying.

It followed his impressive steering of the central bank over the past five years, highlighted in the macro sense by the country’s successful weathering of last year’s global economic crisis thanks to a conservative financial system, a balanced housing market and, in particular, a conservative and closely supervised banking system.

On the micro level, Fischer has also been a success, driving the passage of a new Bank of Israel Law which creates a modern framework for the operation of the bank in line with internationally accepted norms.

In other words, Stan’s the Man, a pleasant contrast to the normal give-and take of Israeli public life where totally unsuitable personalities (and here, dear reader, you can make your own list; mine is headed by Avigdor Lieberman as foreign minister) are catapulted into leadership or representative roles.

This is not to say that Fischer is perfect – the jury is still out on whether his decision to intervene so massively in the foreign currency exchange market to artificially strengthen the dollar against the shekel and thus protect exports will prove to be the right one – but the central bank governor has enough of a track record to speak out on economic issues of the day. His recent warnings delivered with the 2009 Bank of Israel annual report should, therefore, be carefully listened to and acted upon.


FISCHER’S MAJOR concern is the extreme centralization of the economy. The bank’s annual report warned that the biggest holding companies may endanger the country’s economic stability during times of crisis because of their ownership of financial subsidiaries. Nochi Dankner’s IDB, for example, owns Clal Insurance, the Delek Group headed by Yitzhak Tshuva controls the Phoenix insurance company and Shari Arison, of the Arison Group, is the controlling shareholder in Bank Hapoalim.

The report noted that while the collapse of nonfinancial firms during a crisis should not have a system-wide effect, a giant holding company with financial subsidiaries poses an entirely different and more serious risk to the economy as their failure could threaten the entire system. For example, the collapse of Lehman Brothers and the near collapse of AIG were seen in Washington as a threat to the whole US financial system, forcing the American government to intervene.

In its analysis of the country’s economy, the central bank warned that the above-mentioned and other holding companies suffer a “low level of growth and high financial leverage, and therefore higher levels of risks than other companies.”

In addition, the report implies that the connections within and between the different holding companies can stifle completion, reduce transparency and limit the supply of information.

And given the extreme centralization of the economy, too much economic power is based on what the bank termed the strategy, wishes and whims of just a few people who, Fischer noted, are paid far too much.

The solution, according to Fischer, is for the government to force these holding companies to divest themselves from controlling financial subsidiaries and to tax dividends paid by one firm to another inside a particular group. This, as well as his call to restrain executive salaries, will undoubtedly prove unpopular among the tycoons, but Fischer calls it as he sees it, making good use of his independence.

This independence, which reflects both the definition of the central bank’s role and the governor’s own character, is his greatest asset, for he is not locked into what the central bank report describes as the “mutual relations” between the banking sector and business groups, where the same groups of people sit on one another’s boards of directors in a world of interlocking directorates.

The 66-year-old Fischer, unlike many of the Finance Ministry’s senior officials, also has no need to keep an eye out for a job in the private sector once his second term office ends.

But the Bank of Israel does not have the authority to effect these changes; they require Knesset legislation. Now it remains to be seen whether our politicians will find it in themselves to tackle the country’s most powerful business players and legislate far-reaching economic reforms that will safeguard the country’s wider interests, at the cost of upsetting a few tycoons.

One has to hope that Prime Minister Binyamin Netanyahu’s call yesterday to postpone discussion of a private member’s bill on capping executive salaries, ostensibly so the government can form its own position on the issue, is not an attempt to stymie reform.


The writer is a former editor-in-chief of The Jerusalem Post.


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