A viable economy

Fischer's foremost objective now must be to break the cycle before it spirals out of control.

Stanley Fischer (photo credit: Ariel Jerozolimski [file])
Stanley Fischer
(photo credit: Ariel Jerozolimski [file])
There's no envying the next finance minister, even though there's no shortage of candidates lobbying energetically for the post. The fact that Israel's interest rate has hit another all-time low underlines the scale of the challenge. Israel always sought to attract foreign capital (and to keep local capital at home) via interest rates that were higher than those abroad, especially in the US. Now, like all other national banks, ours has drastically reduced interest rates as never before. In actual terms, Israel no longer offers a greater advantage than other countries to potential investors. That growth-oriented Israel would countenance such a situation speaks volumes. It foremost underscores the fact that we are in deep recession. Since recession (like its antithesis, inflation) is a function of the supply and demand of money, the objective of fiscal policy during a recession is to increase money supplies and thereby transfuse the economy sufficiently to sustain itself through hard times. This means disincentives for investors (including small private savers) to keep money out of circulation and earning interest in bank accounts, for example. Funds must be all-but coerced into investments in bonds or stocks, where they fuel economic activity. Lowering interest rates is one such disincentive; indeed, it is the most potent weapon at the disposal of Bank of Israel Governor Stanley Fischer. But there is only so much the central bank - which is in charge of the state's monetary policy, as distinct from real economics - can do. This week's interest rate reduction to 0.75 percent, the latest in a series of such steps that would have been unthinkable a few months back, is also widely regarded as Fischer's last significant resort to such ammunition. There isn't much farther down left to go, and nothing significant would be achieved by additional rate slashes. It is, moreover, difficult for the central bank to adjust monetary policy at a time in which the economy remains on auto-pilot and reliant each month on one-twelfth of the outdated, unsuitable 2008 budget (which was devised in pre-recession 2007 and should have been superseded). As long as no new budget is adopted, the most Fischer's bank can do is apply assorted emergency first-aid measures. It stands to reason that the central bank will switch from its reluctant intervention in foreign currency dealings (geared to put the brakes on the gross overvaluation of the shekel) to an equally reluctant intervention in the financial markets with an eye to prodding investors out of their risk aversion. In one way or another, this will mean injecting money into the parched economy. We know that Prime Minister-designate Binyamin Netanyahu favors tax cuts for this purpose, a remedy that Fischer does not prescribe. BUT UNTIL a government is formed that can produce a budget and get it through Knesset, some fiscal equilibrium must be maintained. That is Fischer's daunting challenge now. He has already curtailed the launching of short-term deposit schemes (MAKAMs) to make fewer non-productive financial shelters available and is sure to continue in that direction. But the next, probably unavoidable, move - much as it flies in the face of purist free-market doctrines - is the purchasing or implicit underwriting of corporate bonds. Bonds are less risky than stocks and constitute loans to the enterprises that float bond issues. By investing in bonds, the central bank would raise their value and thereby coax fretful investors back to what is probably the only relatively low-risk means left for minimal capital gain. Anything akin to guarantees would also shore up sagging confidence and bring investors back to the bond market. The upshot would be that capital-starved concerns would enjoy new cash inflows. This might help keep them in business and prevent a chain-reaction in which the credit-crunch crushes viable firms. When plants like Hatzor's threatened Pri Hagalil fold, their dismissed employees obviously lose buying power. That, in turn, destabilizes more companies, and a truly vicious cycle ensues. With Israel's jobless rate already soaring - especially in the periphery, but not exclusively there - Fischer's foremost objective now, and Netanyahu's soon, must be to break the cycle before it spirals out of control.