you want tools for the job? improvise! the outcome is that instead of implementing monetary policy via the capital market, we do so via the banks, a more expensive and less efficient method. why must we act in this tortuous way? to find the answer to this question we may have to go back to the traditional work methods of the pre - state era. if the story were to end with the improvisations of the bank of israel, so be it. the rate of interest would be, all in all, a little higher than it could have been. but this absurd limitation causes consumers and the economy real harm. in any normal country the treasury bill market provides the basis for the government bond market. as such it also provides the infrastructure for nonbank financial intermediation. in israel, it strengthens the banks ’ monopolistic hold over the money market. the implications are unequivocal : · the banking spread in the unindexed sector is higher than required, to the disadvantage of depositors and borrowers ; · it is another obstacle to the development of the market for tradable securities, short - term commercial paper, as an alternative to bank credit ; · it harms the economy ’ s ability to withstand financial crises, as the economy is totally dependent on the banks for financial intermediation. the treasury bill ceiling causes persistent damage, and it should be abolished. it increases the cost of monetary policy, and causes harm to consumers and the economy as it acts as a millstone around its neck and prevents the development of a nonbank money market. can the horizon of monetary policy be broadened? price stability is measured by changes in the cpi. the question is whether there is a connection between the stability in the stock market and foreign currency market on the one hand, and price stability on the other. it should be emphasized that the question is not whether the central bank should also have objectives in the securities market ( for example, to prevent sharp falls in the stock market ) and in the foreign currency market ( for example, to navigate the exchange rate along a particular route ). it should not! as long as the arrangement of earmarked bonds, the exchange - rate band, and the treasury bill ceiling exist, the central bank must steer clear from any intervention in the financial markets, both in its actions, and in its statements. a similar conclusion applies, and to a similar extent, if fiscal discipline is not maintained, and if

##management of financial institutions. dealing with this falls within the province of supervision, and i will not here go into the question of supervision of the financial markets, except to say that a mechanism for proper coordination between the various supervisory authorities in israel ’ s economy is sorely needed, and it is a pity that it has not yet been activated. the second is artificial restrictions that were imposed by the authorities at some time or other on the mechanism of the market. the removal of such restrictions is essential if financial crises are to be avoided. the major ones are : 1. earmarked bonds the arrangement regarding bonds earmarked for the pension funds provides the clearest example of such restrictions on the market mechanism. this arrangement systematically destroys the market for tradable government bonds, the existence of which is one of the preconditions for a market for private bonds, providing the banking system with a basis for pricing for the system of medium - and long - term deposits and credit. this phenomenon of earmarked bonds will spread even more quickly · if the required tax reform assigning the tax benefits on pension savings mainly to savings for retirement is introduced ; · if the budget constraint on tax relief requires a distinction to be made between savings which entitle the member to a pension and lump sum savings for retirement ; · if the move from unfunded to funded pensions follows the planned path ; · and if a compulsory pension law is passed incorporating the rules which apply currently to the pension funds. the best way out of the earmarked bonds arrangement is similar to the method used in the life insurance field in the transition from guaranteed yield life insurance schemes to profit - sharing schemes. that is : · not to change the rules in the existing new pension funds, but to close them to new members ; · to ensure that pension funds established from now on are based only on the market. if the government can support pension savings and wishes to do so beyond granting tax benefits, it would better do so directly vis - a - vis pensioners, and on a means tested basis. 2. the crawling exchange - rate band the band is intended to contain, currently within fairly wide limits, possible fluctuations of the rate of exchange. it is well known that the conditions which brought about the creation of the band disappeared long ago : · initially the band served as an advanced version of the exchange rate, as a nominal anchor for inflation. the exchange rate has not had this role to play for many years ; · then