Dr. David Klein, the seventh governor of the Bank of Israel has slammed his successor, Prof. Stanley Fischer, in a new book: "The Eighth Governor of the Bank of Israel Stanley Fischer: What he inherited and what he bequeathed", published by Ophir Bikurim Publishers. "The Achilles heel of the eighth governor was his pretension to manage the exchange rate over time by unlimited purchases of foreign currency, with no proven advantage and at high cost involved in protecting a real negative interest rate for long periods, which inflated real estate prices," says Klein.
Fischer was governor of the Bank of Israel from May 2005 until June 2013, when he resigned in the middle of his second term. He has since been appointed Vice Chairman of the US Federal Reserve Board. Klein was governor in 2000-05.
Klein says that the real estate bubble created by Fischer "distorted banking supervision policy on the assumption that it was required to preserve the banks' stability, and reinforced the governor's tendency to avoid measures to foster competition in financial services in general and in banking in particular."
Klein attributes most of Fischer's mistakes to "the American reality from which he drew much inspiration, usually without considering the differences between the Israeli and US economies." He adds that, in contrast to his predecessors, Fischer enjoyed freedom of action because he "inherited an independent central bank and could manage the Bank of Israel as he saw fit, and did so."
Fischer bought $50 billion from March 2008, boosting the Bank of Israel's foreign currency reserves from $28 billion to $78 billion by the time of his departure. His successor, Dr. Karnit Flug, has continued this policy, boosting the Bank of Israel's foreign currency reserves to $81 billion.
Klein claims that the Bank of Israel has no declared foreign currency reserves target, and has already exceeded its two previous targets of $35-40 billion and $40-44 billion. After that, it ceased setting targets. Furthermore, he says that there is no research to indicate that foreign currency purchases are effective and at what cost, but that the Bank of Israel's equity deficit has doubled by NIS 25 billion from less than NIS 20 bill in 2008 to NIS 44.5 billion in 2012.
The Bank of Israel declined to comment on the report.
Published by Globes [online], Israel business news - www.globes-online.com - on March 2, 2014
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