Feathers were ruffled.

Wednesday Bank of Israel Governor David Klein published six reservations to the report written by an internal team about bank fees.

The panel's chief, Motti Fine, recommended canceling several fees that the banks customarily charge, while expanding regulation of the prices the banks slap on services. But Klein has a practically diametrically opposed opinion. He doesn't like the idea of regulating these fees at all.

You could say it attests to Klein's weakness, to his inability to keep the squabbling firmly hidden behind closed doors while presenting a smooth, uniform opinion to the outside world. There was no such dissent broadcast when the governor was Jacob Frenkel.

Or you could argue that the central bank officers are privileged in their freedom to submit reports that fly in the face of their superior, that it attests to freedom of expression at the central bank, which takes pride in having strongly opinionated professionals.

Whatever. The issue isn't the organizational culture at the Bank of Israel, however intriguing. It is the argument between Klein and Fine, which goes beyond mere banking fees: its ramifications touch on the entire business sector.

Klein's context

At cursory glance, Klein seems to be one of the few Jerusalem leaders siding with the banks against a populist onslaught by Knesset members, regulators and the press.

But his opinion paper about the banks' fees should be taken in context with his stand on structural reform of the banks. Klein stated it baldly earlier this week, during a meeting with Yossi Bachar, the treasury director-general leading a team discussing how to separate the banks from their provident funds and mutuals.

Klein said there is a natural tendency to tackle the banks' domination of the capital market, and the absence of competition in the financial sphere, by circumventing them in two ways that ultimately do nothing but make the problem worse. One is to build Chinese walls and the other is to regulate prices, he said. "Neither approach solves a single thing; they whitewash the problems instead of addressing them, allowing the ill results to accumulate until all choices are gone, and the need for a fundamental solution becomes urgent," he argued.

"The right way to improve the competitive structure of the financial services sector," Klein continued, "is quite the opposite, and it consists of two parts: separating ownership" - meaning, forcing the banks to sell their holdings in the funds and underwriting companies - "as a mechanism to improve competition and prevent conflicts of interest, and removing tax and regulatory obstacles that are hindering the development of markets and instruments."

What Klein is saying, is that the government and regulators should not intervene by setting prices. And their efforts to prevent conflicts of interest are doomed to fail, and will - if anything - hamper the development of the markets.

What the government has to do, Klein explained, is create a competitive market structure, where it has no need to supervise prices. It has no need to appoint regulators constantly throwing up Chinese walls.

Adam Smith and us

The bankers and the press and everyone involved in monopolistic sectors understand exactly what Klein is saying. But they hope to have their cake and eat it, too, to scream that the market forces should be allowed to reign unfettered, that the government shouldn't intervene in pricing, and at the same time to object to structural reforms that are designed to allow market forces to act.

For instance, the bankers hope to persuade us that structural change in the financial sector that Finance Minister Benjamin Netanyahu is trying to create is equivalent to "nationalizing" the provident funds, or to "government intervention."

Not so. Quite the opposite is true. It is the government's first attempt to break the banking duopoly that has crushed every nascent sign of a financial market developing outside the banks.

Businesspeople love to quote Adam Smith, the Scottish economist (1723 - 1790) who laid down the fundamentals of modern capitalism, and formulated the "invisible hand" principle. His point was that self-interest guides the most efficient use of resources in an economy, with public welfare being a by-product.

But they tend to forget Smith's next idea, postulated in his book "The Wealth of Nations": that free markets can operate properly only when the government intervenes, because competition is always bad for manufacturers and traders, who will always conspire against consumers.

And when the leaders of Bank Hapoalim and Bank Leumi tell us that preserving their utter control over the capital market is "good for the customers," another Adam Smithism comes to mind: if traders and manufacturers actually manage to fool the public into believing that their interests and its interests are identical, then it is hard to see how the invisible hand can work.