Analyze This: What Fischer can do

Bank's intervention highlights how serious the situation is.

By CALEV BEN-DAVID
Bank of Israel Governor Stanley Fischer wanted to make it clear in his press conference on Sunday; his decision to have the central bank buy up dollars last week to stabilize the shekel - which at one point on Friday had appreciated to 3.35 to the dollar, the strongest it has been in 11 years - was the result of "rare circumstances." "We don't intend to intervene to fix the value of the currency," Fischer told reporters, after the bank had done just that. Citing the damage the rising shekel was likely to cause the Israeli export industry (by pricing local goods out of foreign markets), he nevertheless declared: "We will continue to rely on the market under exceptional circumstances. We hope that intervention will be rare." No doubt he does. But the fact that Fischer did act in this manner, in stark contradiction to the policies he has advocated since taking over the central bank three years ago, highlights just how serious the situation has become. It also points out larger trends in the global economy - and Israel's place in it - that have repercussions beyond the strictly financial sphere. Fischer's ascension to the governorship of the Bank of Israel three years ago was viewed as particularly significant from two different but related perspectives. The fact that a prominent Diaspora Jew, born in Zambia, educated in Britain and a long-time American citizen, was making aliya at the peak of his career to take the position, was proudly seen (especially by his fellow Anglo-Israelis) as a Zionist reaffirmation. More significantly, Fischer's taking the job after holding major positions at the World Bank, International Monetary Fund and especially the massive Citigroup financial conglomeration, was viewed both here and abroad as a sign that the Israeli economy had come of age. Certainly a figure such as Fischer would not have taken the job, or been welcome to it, in the old statist Israeli economy, dominated by the Histadrut Labor Federation and government-regulated monopolies, unaccommodating to foreign investment and distrustful of financial speculation. The country's transition to a modern Western economy powered by an innovative hi-tech export industry and capital-fueled by vigorous financial markets paved the way for Fischer's arrival. A mature Israeli capitalism was ready for his laissez-faire philosophy to currency markets and his disciplined approach to setting interest rates. And indeed, over the past three years he has helped guide the economy with a steady hand, overseeing an impressive period of growth despite the severe disruption of the Second Lebanon War in 2006. Fischer made clear yesterday his confidence that this trend will continue: "There is huge flow of capital into the economy by foreign investors and Israelis who are returning their money home. With the economy's current rate of growth, we are passing beyond the definition of a developing economy into that of a developed one." Yet such are the vagaries of the global marketplace that sometimes such success can be too much of a good thing - especially when your key economic partner is hurting. The problems Fischer is dealing with now regarding the relative value of the shekel are not of his, or Israel's, making. They stem largely from a falling dollar, thanks to a US economy on the verge of a recession (or maybe already in it) because of depressed real estate values, the crisis in the subprime-mortgages market and rocketing fuel prices. How bad are things getting in America? If Fischer's intervention in the foreign currency market was seen as an exceptional event, at odds with his economic philosophy, that's nothing compared to what happened the same day in the US. On Friday, the Bush administration engineered a bailout of Bear Stearns, one of America's largest investment banks, which was facing a credit crunch that might have led to its collapse. The White House justified its rescue of Bear Stearns, a complete reversal of its conservative economic policies, on the grounds that inaction might have led to a domino effect on other major Wall Street financial institutions also under severe strain. It is ironic to think back to the days in the early 1980s when then-Likud finance minister Yoram Aridor proposed a "dollarization" of the Israeli economy that would have completely tied our local currency to that of the US. Aridor lost his job over that idea - not because anyone had the foresight to see that the day would come that the shekel would rise so quickly against a declining dollar, but because it was regarded as a sacrifice of economic independence at odds with Zionist values. But no modern national economy is truly independent in today's integrated global marketplace, Israel's is fundamentally interdependent with America's. A strong shekel may be in Israel's interest, but not when that value begins to be inflated largely thanks to economic woes in the US that could also trigger an economic slowdown here. Fischer, whose arrival at the Bank of Israel was hailed in part due to the cachet of American expertise he brought with him, now finds himself having to try and insulate the Israeli economy from shock waves emanating from the very same financial markets in which he once played with the other big boys on Wall Street. Of course, given the current situation there, there are worst places Fischer could be - for example, still working for his old employer, Citibank. Just last November, the now-troubled giant financial institution needed its own emergency bailout - which in this case came from selling a $7.5 billion stake to the Abu Dhabi Investment Authority, making the oil-and-capital rich Gulf State the biggest investor in Citibank. That's another consequence of the US economy's current financial woes - one that neither Stanley Fischer nor anyone else here has an answer to, and which in the long term should perhaps trouble us even more than the value of the shekel vs the dollar.