Why Conservatism Can Be an Advantage: How Israel Avoided America and Europe’s Mistakes

Interest Rates | Why Conservatism Can Be an Advantage: How Israel Avoided America and Europe’s Mistakes

There has been heavy criticism of the Bank of Israel and Governor Prof. Amir Yaron for reacting too slowly and for not cutting interest rates during the Iron Swords war, except for a single cut at the start of the fighting. That was true even as the United States and Europe sharply lowered rates. Central banks base their rate decisions on the state of the economy. When inflation is too high, they raise rates to cool it down, and when it is low, or if unemployment rises and there is concern about slipping into recession, they lower them again.

Central banks worry about a yo-yo effect. Cutting rates too quickly gives the economy too strong a boost and causes inflation to surge, which forces them to raise rates again, creates confusion, and may even lead to the most frightening scenario of all, stagflation, a combination of high inflation and low growth. Over the past year, the concern in Europe and the United States has been that central banks moved too quickly to lower rates while inflation was still too high and macroeconomic risks remained significant.

This week we saw that twice. First, in the jump in oil prices following the war in Iran, which pushed inflation in the United States to 4.2%, a three-year high and far above the 2% target. In the United States, it is estimated that the Fed will be forced to raise rates by the end of the year. Second, the European Central Bank was forced to raise the interest rate it had been trying to avoid, after a year with no change at a low level. In doing so, it is effectively acknowledging its mistake, cutting too quickly.

And who did not have to do that? That is right, the Bank of Israel, which chose to be conservative and wait so that it could lower rates gradually. Earlier in the decade, that slowness worked against it, when it delayed raising rates to cool inflation. This time it is working in its favor. Recession and high inflation are worse for the public than high interest rates. The success of the Bank of Israel now is also our success.

Nathaniel Ariel

Debt Market | The Collapse of Another Bond Company Sends a Worrying Signal

This week, the turmoil around the American bond company Cimed escalated. The company raised NIS 620 million in Tel Aviv in December from institutional investors and failed to make an interest payment. It reported that the Securities Authority had opened an investigation against it after it emerged that the controlling shareholders, brothers Michael and David Shabsels, withdrew about $34 million from the company’s coffers since the start of the year.

According to reports, the Authority may seek the extradition of the brothers to Israel for questioning and prosecution. Cimed, which operates summer camps in the United States, petitioned a New Jersey court for creditor protection under bankruptcy proceedings, Chapter 11.

Cimed joins a series of American bond companies incorporated in the British Virgin Islands, which came to Tel Aviv solely to raise debt on favorable terms and then ran into trouble. Some of the companies even collapsed, leaving debts of about NIS 4 billion. This painful experience led regulators here to become more suspicious of foreign bond companies, from prospectus supervision to ongoing inspections intended to protect investors.

None of these efforts managed to prevent harm to Cimed bondholders. The attempts now to impose responsibility on the controlling shareholders are also understandable, but that is closing the barn door after the horses have bolted. Regulators and institutional investors will have to draw lessons again this time. But the truly grim conclusion is that even when oversight is in place, there is probably no airtight protection against those trying to make a quick profit at investors’ expense.

Amiram Gil

Commodities | Trump’s Post Reveals an Important Truth About Oil

President Trump published a surprising post on his Truth Social platform: “I directed our mighty U.S. military to carry out a secret mission to support oil tankers and other commercial vessels through the Strait of Hormuz. Today, I am pleased to announce that the effort has resulted in more than 100 million barrels of oil passing through the strait. More than 200 ships passed safely through the strait.”

The amount he cited may be exaggerated, but the event did happen. According to checks by the maritime intelligence agency Lloyd’s List, about a quarter of the ships, several dozen, that were stuck in the Persian Gulf were released.

That probably also showed up in the oil price. Although the closure of Hormuz has lasted far longer than expected in March, and despite the escalation in recent days, the price of a barrel of Brent crude still remains below $100. That gives the United States important breathing room to carry out a counter-blockade against Iran and pressure it at the negotiating table. Such a strategy requires time, and the lower oil prices go, the less political and economic pressure there will be on the United States to compromise with Iran.

On the other hand, it is hard to see how such a strategy is sustainable. Ships not under Iranian protection do not tend to enter the gulf if they have another option, so this will not allow the Gulf states to export normally by sea. The ability of countries like Iran to unilaterally block critical straits is a genie that will not be going back into the bottle anytime soon.

Still, the combination of such actions, the release of emergency reserves and increased exports by other countries means that forecasts by economists like Paul Krugman, according to which oil prices would rise above $150, are not materializing. Or perhaps, simply, our economy is much less dependent on oil than we thought. What is certain is that fossil fuel is losing some of its prestige in terms of reliability, and the likely beneficiaries are renewable energy entrepreneurs.

Idan Arad