process. nobody would understand why the largest financial market in the world suddenly were to go its own way on capital rules. every country must absolutely avoid seeking advantages by watering down, or by reluctantly implementing agreed reforms. such a policy would only lead to new tensions in the financial markets during a time of anyhow increased stress. we simply cannot afford going down this route. bis central bankers ’ speeches 5. reviving individual responsibility the crisis has opened our eyes to an undue reliance on the market that has sometimes prevailed. confidence in the financial system will only return if we improve the rules of the game. yet, regulation can and will never catch everything. it can only put in place a consistent and reliable framework in which financial transactions take place, and try to prevent market forces from getting out of control. this does not mean simply banning undesired activities and stopping market processes. statism and dirigism are, by no means, the right path to take. market participants themselves must do their part to strengthen financial stability. this implies, above all, returning to a founding principle of social market economy : individual responsibility. those who take risks must not only reap the benefits but also face the consequences. the possibility of loss and default is a constitutive element of any functioning market economy – and financial markets cannot, and must not, be an exception to this. that is why it is so important that all financial institutions are able to exit the market in case of insolvency without impairing financial stability. and without using taxpayers ’ money. reviving individual responsibility requires a change in behaviour and a change in culture within the financial sector. the manipulation of libor is just one shocking example for this. bad attitude cannot be fixed by a few new rules. nevertheless, a lot has already been set in motion. banks are now seeing themselves more as servants to the real economy. many move away from unrestrained pre - crisis profit targets. they are reconsidering their business models as well, focusing on retail and corporate banking. remuneration practices in the financial sector are also slowly, but surely changing for the better. there is no disputing that mismanaged remuneration systems helped cause the crisis. asymmetries in terms of risk and reward led to short - termism and excessive risk - taking. remuneration needs to be aligned to prudent risk - taking and be based on sustainable creation of value, rather than on short - term

stanley fischer : issues of fiscal policy summary of remarks by professor stanley fischer, governor of the bank of israel, at the bank of israel research department ’ s annual seminar, jerusalem, 27 december 2012. * * * the area of taxation in particular, and the fiscal area in general, are in my view among the most interesting areas, and among the areas where theory can contribute the most to delineating policy. my lecture will deal more with macroeconomics, where theory is perhaps less deep but still very important. so what is the starting point for the economy heading into the upcoming period? from the standpoint of growth, we are in a relatively good position. the average growth rate over the past few years has been about 3. 7 percent. currently we are growing at a rate lower than that, if we don ’ t take into account the expected effect that the start of natural gas production will have on growth. the israeli economy grew at an impressive rate in the years prior to the crisis, and the recession during the global crisis was relatively moderate. the unemployment rate is relatively low, even though we are still having difficulties interpreting the new labour force survey data. long - term interest rates are low, and the yields on ten - year government bonds are under 4 percent, and are continuing to decline despite the problems the economy is facing. in the fiscal area, there has been a continued decline in government expenditure as a percentage of gdp since the start of the program led by prime minister sharon and finance minister netanyahu that began in 2003. the rule that determined that expenditures shall not grow by more than 1 percent in real terms is to a large extent responsible for this trend. another factor is the defense budget, which reached 35 percent of gdp after the yom kippur war, was 20 percent of gdp prior to the stabilization plan, and has been in constant decline since then, other than during the second intifada. we currently have a defense burden of about 6. 5 percent of gdp, lower than the ratio that existed, for instance, in the united states during the korean war. government revenues also declined in relation to gdp in recent years, reaching 38 percent of gdp in 2011. this is mainly the result of the reduction in direct statutory tax rates, which has led to a change in the tax mix. in 2003, the deficit was slightly greater than 6 percent of gdp, but the cyclically adjusted deficit was about 3. 5 percent. however, today, the deficit