The Beginnings of a Liquidity Trap in Israel

Mar. 9.09 | About: iShares MSCI (EIS)

With Israeli interest rates near zero, it appears that local consumers are moving money out of deposit accounts into non-interest bearing checking accounts, thus creating the beginnings of a liquidity trap.

According to a Globes report: “Bank of Israel officials now note that a liquidity trap has developed. The minutes state, “Despite the fact that the Bank of Israel’s interest rate is still positive, the interest the banks pay depositors is close to zero, and they have little room to reduce it further. In this situation, in order to preserve the interest rate spread (also known as banking spread), the transmission mechanism from a reduction in the Bank of Israel interest rate and the rate charged to borrowers is weakened.

“In these circumstances, there could be a switch from time deposits to current-account deposits, which would make it more difficult for banks to manage liquidity and to balance deposits and loans to different terms. The public may also switch from bank deposits into other assets that could create an undesirable increase in risk for savers in the financial system.”

Now what? I say forget about interest rates. They are low enough. Fischer needs to get on the Benjamin Netanyahu bandwagon and start calling for lower taxes, and privatization. Want to see huge amounts of private investment. Privatize the land authority and watch the Israeli economy take off. The answer is to incentivize people to take risk, not to encourage them to stick money in the bank at 0.25%. No wealth or economic growth will come from that.