The authorities need to give the average, non-gambling, working citizen some peace of mind.
By JERUSALEM POST STAFFcurrency 88 shekel(photo credit: )
On the face of it, Israeli investors shouldn't be among the victims of the current international financial downturn. Relatively speaking, our economy is hardly unregulated and our mortgage houses and banks have not behaved recklessly.
Nevertheless the mere fear of a global recession affecting local firms has already caused major repercussions. The heaviest losers are the most unlikely - average Israelis whose life savings are invested, often without their knowledge or control, in corporate bonds. These instruments fell in September, nosedived during the past month, and may further decline in November.
There's scarcely an untouched Israeli household. Anyone whose pay-slip shows deductions for pension funds, provident (gemel) funds, or educational (hishtalmut) funds is adversely impacted. Anyone with long-range investments via mutual (ne'emanut) funds, life insurance and the like has also suffered severe losses, though these investments were marketed as safe, conservative and minimally speculative.
In the past, all the above were largely invested in government bonds. However, particularly since 2004, the government issued fewer and fewer such securities, mostly because it could afford them only by raising taxes and thus gumming up the economy. The funds were encouraged to turn increasingly to corporate bonds, chiefly of well-established conglomerates and stable concerns with very high ratings (as distinct from unrated risky bonds).
The situation was desirable, clearly contributed to economic growth and no government intervention was necessary. But times are no longer normal, even if the Treasury and the Bank of Israel assert that their "vigilance" suffices to calm mass anxiety.
Panic is contributing to outflows from institutional savings frameworks, and savers withdrawing holdings frequently take excruciating losses. These are particularly regrettable because they aren't mandated by reality. Moreover, fund managers are forced to sell bonds to enhance liquidity. Under current market conditions there's minimal demand and hence any sales offers push bond prices - both government and corporate - sharply down.
These falls only fuel the panic further and create a vicious cycle, though most bonds are expected to pay back on maturity. Only a major catastrophe and numerous bankruptcies could bring down funds whose investments are distributed in many and varied securities. Such a catastrophe isn't probable but panic, even if unwarranted, is a potent detrimental factor.
THIS IS where the government must come in, even if such interference negates the mantras of free-market economics. No doctrinaire adherence to any philosophy should be allowed to replace common-sense. Just as too much regulation is damaging, so are dogmatic hands-off policies. Governments must step in at points of crisis. Not long ago, the Bank of Israel bought a million dollars daily to foil speculation which artificially buoyed the shekel.
Twelve years ago, a safety net was offered for government bonds. A similar safety net is now needed for rated corporate bonds - to protect the many Israelis whose fortunes are intertwined with them, and to renew and shore up confidence in quality low-risk securities which are taking a beating because of what can only be described as mass hysteria.
This may involve a Treasury undertaking to guarantee the values of bond investments from a specified date. Odds are that the government won't have to spend anything underwriting these securities because the psychological boost would be enough to lift them back where they naturally belong and where their actual performance and potential places them.
This was the case in 1996 when, following aftershocks from the 1994 market crash, the value of government bonds plummeted. The Treasury guaranteed that it would buy them back at a given price. Having quelled apprehension, the government didn't have to do much purchasing. The phobia dissipated.
This is precisely what is prescribed at this abnormal juncture. Our economic decision makers aver that any move on their part would spur panic. But panic already exists and its potential harm is incalculable.
When turbulence subsides, market forces can again reign supreme without intervention. But as the American and European examples show, even diehard capitalists understand that there must be a sane balance between intervention and laissez faire. In this case it behooves the authorities to give the average, non-gambling, working citizen some peace of mind.
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