meetings where we said something like, “ this is what we have to do, we are not certain how it will work out, but this is the very best thing we can do ”. q : what happens to politicians when they get their hands on a budget? a : there ’ s a natural tendency to want to spend more money, because everybody asks you to spend more money, and the pressure is always people coming along and wanting money for this and for that. that ’ s why in some countries you need to have a very powerful treasury, as we have in israel. there is this spending tendency, governments prefer to run deficits. it ’ s very interesting that in two cases that culture changed dramatically – canada in the 1990s and australia in the 1980s – were chronic - deficit countries in australia now it ’ s bad for the government to run a deficit, and in canada they worry about the deficits much more. why? because they cut the deficits and they grew much faster in both cases, they saw the results of running a decent economic policy. can you rely on that? not really, it depends on each country. q : what do you see as your responsibility when house prices, or property prices, get out of kilter? a : we have to do what we can to prevent that happening. the main problem for a central bank is that it operates on the financing side, which is to say on the demand side of the housing market. we can raise the interest rate, impose regulations on the banks, which we ’ ve done, that will moderate the impact of low interest rates on demand for housing. but … reducing the price of housing on the demand side does not cause more houses to be built, it causes less houses to be built. the real place that you can get action that will solve the housing problem is on the supply side … if you increase the supply of land in this country more rapidly, you will be able to get housing prices down. if you can speed up the pace at which it ’ s possible to get planning permission, which is the place we ’ re worst in the doing business study – if we can deal with those prices, we ’ ll get the supply of houses to go up, which will increase production and reduce prices. we have to do what we can because we operate on the demand side, but we don ’ t have the control over supply that would enable israel to solve its housing problems. one of the reasons we ’ ve

don ’ t need to do that now. q : where do you stand in terms of tax rising or spending cuts to help balance the budget – or does it not make much difference to you and the central bank? a : most research shows that changing expenditures – cutting spending – is more effective than raising taxes as a way of dealing with the budget deficit. but we ’ ve cut taxes a lot in the bis central bankers ’ speeches past years, and the bank of israel has argued that the cuts were a little too fast, and they have in fact been rescinded to some extent. you can ’ t do these things independent of asking what you are spending on. if we have to increase our defense budget, if we have to increase our education budget, then we ’ ll have to finance these things. q : do you believe there should be an increase on social spending, on education? a : increasing the efficiency of spending in these areas would be very useful. we have a very big educational problem in this economy, and at some point we are going to have to deal with it. we have been dealing with it, we probably need to do more. q : whichever government takes office, there won ’ t be much time and there won ’ t be much wiggle room to get this right … if you don ’ t get a budget deficit under control, it can get out of control very fast. a : if you don ’ t get it under control in the first year, that is 2013, which will be about half a year, or a little over half a year, it will be much harder to do in the future. putting off these problems very rarely works. q : when you go to those meetings, at the imf and other international forums, and you meet your european colleagues, you ’ re enormously respected, you ’ re very well known, your views count – do you ever not want to just say to the european ministers, get your act together – you ’ re causing mayhem and mischief? a : what are the europeans trying to do? they ’ re trying to build a federation at a time of enormous difficulty – enormous economic difficulties and political difficulties. so they ’ re taking more than a year or two to do it. that ’ s very frustrating. on the other hand, if they get it done, they will have created a different europe for the long term, and that ’ s what we need them to do. q : you know as well