Our interview with Governor of the Bank of Israel Stanley Fischer comes shortly before the Annual Meetings of the International Monetary Fund (IMF) and the World Bank Group. The meetings, which open officially in Istanbul this Monday, are Fischer's home ground. For seven years, from 1994 to 2001, he served as First Deputy Managing Director of the IMF, and he was Special Adviser to the Managing Director from 2001 to 2002.
As ever, Fischer is elegantly dressed and calm, and talks in a quiet monotone even when the subject is the greatest economic crisis since the 1930s. The treatment for the crisis offered by Fischer and his fellow central bank governors around the world was low, almost zero, interest rates. "If there were people who thought that cutting interest rates had no effect on the economy, they can't think that today. Without that intervention, we would not be emerging from the crisis at the present rate," he mocks.
Have practically zero interest rates not generated a liquidity bubble?
"There's no need to call it a bubble," Fischer answers categorically. "We lower interest rates so that the public will invest in other assets. When they tell me sorrowfully that there's nowhere to invest other than in the market, I don't commiserate; that's exactly how a low interest rate is supposed to affect the economy. Had we raised interest rates to high levels, the markets might have been damaged. But no central bank will behave like that, certainly not the Bank of Israel."
But isn't the low interest rate causing a bubble in the real estate market?
"In my view, there is still no real estate bubble. Altogether, real estate prices in Israel haven't risen much over the past decade, and it's natural that prices should rise when interest rates are very low. At present, the rise in housing prices isn't problematic, and when we raise the interest rate, demand will fall. According to the Federal Reserve's approach, you have to wait until the bubble bursts and then deal with the problem. We won't wait until then to act. So, for example, as early as March this year the Supervisor of Banks, Rony Hizkiyahu, directed the banks to reduce the proportion of prime interest rate-linked mortgages, and they have in fact fallen from 80% of all loans to 60%, and that has contributed to the stability of the system."
In contrast to last year, Fischer is optimistic at present. "I have no doubt that the tough parts of the crisis are behind us. In the last quarter of 2008, we saw things we had never seen before; precipitous falls in the markets and in global exports, and the collapse of well-known financial institutions. Things happened that we would never have dared think might happen, and there was great uncertainty, there was fear for the world's financial systems." Thus Fischer calmly describes the storm that blew up only a year ago.
A year ago, on his way to the IMF meeting in Washington, Fischer decided at the last minute, when he had already boarded the plane, to stay in Israel and supervise events at close range. "There were many doubts over the success of the fiscal plan in the world, especially over the US plan," he recalls, "but by April it was clear that a change had occurred. The chance that it might be a matter of a 'W' recovery still exists, but it's fairly low."
Are you still worried?
"Today, I'm less worried. It's possible to relax, but not to overdo it; there are still problems, and still more things that need to be done. I am however concerned that, because we are emerging quickly from the crisis, we might not derive from it all the lessons that we should, particularly in the financial system. In the US, for example, the Treasury is trying to lead a reorganization of the regulatory system. That's a complicated but necessary task, because the US regulatory system is very problematic and disorderly."
"I haven't yet been asked to extend my term"
The issue that macro economists are currently wrestling with is how central banks and governments will exit their expansive policies and injections of liquidity into the global economy. Fischer doesn't see a problem. "I don't quite understand why it's difficult to exit an expansive monetary policy, and I don't see the great problem. You have to end a policy of expansion when you're ready, and do it gradually. It's not all that hard. How to avoid a severe recession was a big problem that required creativity. Now, we have to look ahead. We raised the interest rate by 25 basis points. Every newspaper is now trying to find the problems that will arise as a result, so that it can say 'we saw it coming', but in my opinion no problems will arise."
Will there be more interest rate hikes?
"It seems that the analysts expect that I will behave like the Fed did in 2003, when it raised rates consistently by 25 basis points every month. I had no intention of sending such a message, and when you do something, it has more impact than mere talk. Now they understand that we won't raise the rate every month. All I can say is that it is likely that in another three years, the interest rate will be higher than it is today."
On regulation, will you make unification of financial market regulation under the Bank of Israel a condition of agreeing to stay on for a second term?
"I don't send threats or messages. It's not a condition, but part of the discussion on what is required of the Bank of Israel."
And has there already been discussion of a second term?
"I have not yet been approached. I have another six months in the post, that's still a long time, and things can change overnight."
"Privatizing Leumi via the stock exchange isn't a gamble"
What is the state of Israel's banks today?
"I see no real problem in the Israeli banking system. The banks are in an especially good state in terms of capital, but we will see the consequences of the crisis in the next couple of years, and it may be that then there will be new problems. That's one of the reasons that the Supervisor of Banks is requiring the banks to meet a high capital adequacy requirement."
What's your view of the Finance Ministry's intention of privatizing Bank Leumi via the stock exchange?
"We support the privatization of Bank Leumi via the stock exchange, but the authority to decide lies with the government."
Will you give Shlomo Eliahu a bank control permit?
"I have no intention of commenting on this or that investor."
How will the Bank of Israel deal with a situation in which the state relinquishes control of Bank Leumi and no controlling interest has formed?
"Almost everywhere in the world, banks are run without controlling interests. There has to be an amendment to the Marani law to do with the way directors are chosen, so that the bank can act like other banks around the world, but that can be done. If someone tries to build a controlling interest, we will have to decide whether to give them a permit, and of course there is the possibility that there will be no controlling interest."
Don't you see that as a problem?
"It's true that when there is a controlling interest, there's an address to turn to, but the question is, who answers at that address? One reason that Rony Hizkiyahu and I support the idea that banks should be able to operate without a controlling interest is that we don't always find that having an address helps. In principle it's true that there's always someone to turn to, but if there's no address, the regulator works vis-à-vis the board in the same way that he works vis-à-vis controlling shareholders."
Isn't it too adventuresome to carry out the first regulatory experiment with a bank without a controlling interest on Bank Leumi, the largest bank in the country?
"It's not an adventurous step, because in any case it's clear to us how to regulate the bank if the sale is to the public via the stock exchange."
You ousted Dan Dankner from the chairmanship of Bank Hapoalim, and now he has been appointed CEO of Arison Investments. Don’t you see that as defiance of the Bank of Israel on Shari Arison's part?
"Arison Investments is not a bank. As for Bank Hapoalim, there has been enough talk. As far as I am concerned, the Dankner affair ended as we hoped it would, and I don't want to prolong the discussion of the matter."
In the future we'll be glad of currency reserves at this kind of level
Every central banker can declaim in his sleep the pointlessness of intervening directly in the foreign currency market to change local currency rates. Such intervention is doomed to failure, the economists have taught. Fischer too knows the textbooks. He even wrote some of them. In October 2007, we asked him in an interview whether he was concerned at an exchange rate as low as 3.5 shekels to the US dollar. His answer at the time was, "In the long run, monetary policy cannot influence the exchange rate, especially when there are real capital flows into Israel."
But when the shekel started to strengthen against the dollar causing real damage to Israeli exports, Fischer changed his spots. In April 2008, the Bank of Israel began to intervene in the foreign exchange market, at first in small doses, buying $25 million a day, and then at a daily rate of $100 million. The shekel, which reached a peak of 3.2/$, started to weaken, and in March 2009, it reached 4.2/$. The weakening of the shekel was partly due to the strengthening of the dollar on world markets, but also partly due to the Bank of Israel's aggressive intervention. Incidentally, the official excuse for intervention was that it was meant to boost the foreign currency reserves.
Meanwhile, the trend has changed, and the shekel has started to strengthen again, reaching 3.7/$. Fischer changed strategy and adopted a policy of ambiguity. Instead of regular purchases, the bank started to intervene in the market without notice, and in steadily rising amounts. Fischer ages ago stopped saying that the goal was expanding the foreign currency reserves, and declared to the market that his intention was to weaken the shekel. But the result has been a massive rise in the currency reserves, from $29 billion in April 2008, to $57 billion at the end of August 2009.
Fischer rejects the statement that he supports a strengthening of the dollar. "It's important to look at the value of the shekel against other currencies, not just against the dollar. The shekel-dollar rate is currently around 3.77/$, but the shekel has hardly strengthened at all against the euro. You have to understand that the US is not our biggest export market, and look at the effective exchange rate against the currencies of countries or blocks with which we trade. There are four such currencies: the US dollar, the Japanese yen, the pound sterling, and the euro, so it's a mistake just to look at the dollar.
"In the past two years, we have managed to reduce substantially the use of dollar-denominated contracts in real estate, and I hope that this year we will persuade people to stop thinking that the value of the shekel is measured only against the dollar."
How long will the Bank of Israel's intervention in the foreign currency market continue?
"Our intervention will reduce gradually. The shekel is considered a serious currency; there are international investors who see the shekel as an investment instrument, which was not the case in the past. There will be instances in which we will have to intervene, but I hope that it will be on a smaller scale."
Will the dollar be weak for a long time?
"The dollar will not continue to weaken. If there's one area where it's risky to give advice, it's in foreign currency. Four years ago, all the clever people said the dollar would weaken, and all the clever people lost a lot of money, because volatility in foreign exchange is very high."
At nearly $60 billion, aren't Israel's foreign currency reserves too high?
"The foreign currency reserves are not too high. In the light of what we saw in the recent crisis, and in the light of Israel's special situation and the threat of a boycott, it's desirable that the currency reserves should be high. The day may come in the future when we will have to use the reserves, and then we will be glad that we have reserves at such a level."
What do you mean?
"We mustn't become complacent. We're in a good position today, but our responsibility is to be prepared for future dangers that the economy faces. We must therefore be constantly geared up to deal with problems, even if their likelihood is low at present. The crisis changed my attitude, and today we find ourselves in a far more dangerous world, from an economic point of view, than we were in before the crisis. It's therefore worthwhile living with safety margins."
Published by Globes [online], Israel business news - www.globes.co.il - on September 30, 2009
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