The Bank of Israel today cut the interest rate not because it believes that this is the right prescription for the economy's needs but to prevent the shekel from strengthening too much and harming Israeli trade. The Bank of Israel warns with one hand about a mortgage credit bubble, while with the other hand it lowers the interest rate to prevent the shekel from gaining too much ground.
Waving both hands around is generally seen as a sign of despair.
The Bank of Israel is committed to copying the interest rate policies of US Federal Reserve chairman Ben Bernanke who built an academic career on researching then history of the Great Depression. In his imagination, he would return in a time tunnel, throw out vast heaps of money from a helicopter, and create liquidity that would prevent the negative vicious circle that fed the Great Depression and perhaps the Second World War too.
Bernanke is infatuated by the role of being a superhero and the belief that the US problem is a negative dynamic that feeds itself, and he therefore continues his incessant policy of quantitative easing. Warren Buffett, who can hardly be accused of extremism, is already panic-stricken and has openly called the Fed, "the world's largest hedge fund."
Bernanke's policies are bad for the US and bad for the entire world. America's problems won't be solved by low interest rates. The shortage of hundreds of thousands of engineers and production infrastructures that have moved east won't be solved by zero interest rates. The notion that it is possible to stimulate the economy through the capital market and cheap credit is bankrupt. The problem is that we in Israel have adhered to the ideology of Bernanke's helicopter and are suffering because of it.
Cutting Israel's interest rate will fuel the housing market, and that's dangerous. The message being conveyed to the public is clear: Take more variable interest rate mortgages. Why not? Zero is the new black.
In the absence of a Bank of Israel Governor, we cannot expect new policies or a different approach. However, we can foster the hope that the government will soon appoint a new governor who will attempt to change the rules of the game.
In a world in which the Fed behaves like the world's largest hedge fund, there is no room for talk about a free economy. The relevant question is how the State of Israel can protect itself from Bernanke's hedge fund? How can we prevent ourselves from walking with our eyes wide open straight into the same dynamic that that US went through between 2002 and 2008, when low interest rates blew up a real estate and credit bubble that exploded so loudly that it still resonates today throughout the world's capital markets?
The new Bank of Israel Governor will have to consider raising Israel's interest rates to an appropriate level for the domestic economy, and to restrict the influence of the foreign currency exchange rate through taxing new foreign deposits. Yes that sounds like an economic recipe from the 1970s but it's probably the only way to protect ourselves from a man who is still stuck in the 1930s.
The author has a Ph.D. in Economics.
Published by Globes [online], Israel business news - www.globes-online.com - on September 23, 2013
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