- as - you earn one gains momentum, and especially once the proposal to introduce an obligatory pension scheme in the present institutional structure is accepted. • israel's treasury bill market is paralyzed by the folly of the ceiling on the amount that may be issued, so that while the market for treasury bills is one of the most developed in western money markets, ours is unable to take off, and the spreads between the bank borrowing and lending rates are higher than they should be. • the market for commercial papers has barely reached lift - off. • the market for mortgages and the financing of other long - term investment has not managed even to get to the drawing - board. • the banks'control of the provident and mutual funds is as tight as ever, regardless of their performance. • and on top of all the above, serious distortions were created because of tax regulations that were introduced at a time when the government was involved in everything, and that really was a long time ago. our ability to change these regulations seems to be further away now than ever. the reason why i am bringing all this up here is because monetary policy only begins when the central bank sets'its'key interest rate. shifts in this interest rate should have an impact via the changes it causes in the behavior of households and firms. one of the differences between us and the us is that the americans are involved in the financial markets to a far greater extent – whether as borrowers or as investors – than israelis. a rise in share prices, not to mention in bond prices, means a fall in the cost of capital, and vice versa. this of course affects both investment and consumption. the result is that the interest - rate changes that are initiated by the central bank have another channel of transmission in the us that does not in effect exist in israel, namely, the channel of the financial markets. as you know, the interest rate is one of the factors influencing the financial markets - when these exist, of course. this additional channel intensifies the impact of interest - rate changes on the economy, and shorten the lags with which a given interest - rate change affects economic activity. in israel, the bank of israel has had to conduct its interest - rate policy primarily vis - a - vis the banks, and even the little that can be done via the capital market cannot be achieved to the full because of the ceiling that limits treasury bill issues. it is obvious that a policy conducted in such conditions is far

in its wake. only the policy shift saved us from certain disaster, teaching us once again the lesson that we have learned several times in the past : growth led by consumption cannot be sustainable in israel. the americans, on the other hand, are building on that alone to revive their economy. both their monetary and their fiscal policy are expansionary – the former by rapid interest – rate reduction and the latter by tax reduction – in order to stimulate growth through an increase in private consumption. if as a result there is a rise in the balance - of - payments deficit, so be it. it is true that from time to time somebody stands up and says that things cannot go on like that, but so far it has worked. maybe because the alternatives are less appealing. another angle of the same situation is that us secretaries of the treasury advocate a strong dollar, while israeli ministers of finance prefer a weak shekel. 3. the financial markets the third difference lies in the structure of the financial markets. it is widely known that the us has the most developed financial markets in the world. in the last few years the nasdaq has attracted widespread publicity, but the main point is that the americans have a developed system of non - bank financial intermediation, comprising inter alia a huge market for both treasury and corporate bonds. there are also markets for the financial instruments that have developed in the last twenty years, primarily derivatives of various kinds on interest rates, exchange rates, and share prices. in addition, there is an institutional system outside commercial banking that includes investment banks, financing institutions, asset - and financial - management services, and brokers of various kinds, offering a variety of financial services. and what about us? • the stock market may be replete with companies registered for trading, representing a large number relative to the size of our economy, but with a small turnover and a concentrated ownership structure. all this is despite the fact that the management of the stock exchange has done all it could – and even more – to introduce trading and clearing systems that are among the most advanced in the world. • the market for government bonds is drying up a little more each year because of the proliferation of non - tradable earmarked government bonds, and if nothing is done it will gradually die. the market for tradable bonds will dwindle even more rapidly once the switch ( commendable in and of itself ) from a pay - as - you - go pension system to a pay