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At the Davos Conference in January 2007, a New York University economics professor named Nouriel Roubini warned that the US financial system was heading for a meltdown, thanks to the retreating housing market, the growing credit crunch involving sub-prime mortgages, and an over-extended banking system.
Nonsense, replied fellow panelist Jacob Frenkel, vice-chairman of insurance giant AIG.
"The dire predictions haven't come to pass. The dollar hasn't collapsed; the yen hasn't appreciated dramatically; oil has not reached $100," said Frenkel, according to The Daily Telegraph. "A slowdown in housing degenerates into a recession only when the banking sector balance sheets are weak, which is not the case now."
Frenkel was wrong, of course, disastrously wrong. The banking sector was dangerously overstretched on unsteady housing loans, and AIG, which foolishly gambled on insuring billions of dollars of those risky sub-prime mortgages, has become a prime victim of the current financial turmoil, saved from total collapse this week only because of massive US government intervention.
Frenkel is known here, of course, as a renowned economist and former governor of the Bank of Israel. His disciplined stewardship of this country's monetary policy during his tenure (1991-2000) is rightly given credit for laying the foundations of the steady economic growth that Israel continues to enjoy.
It's too bad that he wasn't able to exhibit a similar sense of caution and restraint to AIG, and as a result, he will presumably be cleaning out his office soon. In Israel, Frenkel was able to impressively maintain his position for a tight fiscal policy in the face of considerable political pressure, especially from the Labor governments of the 1990s. But at AIG, he apparently wasn't able to buck an American corporate culture in which some executives gamble recklessly with investors' money in search of quick profits, to justify salary and bonus checks that have become bloated beyond all proportion.
The US economy will recover from this current mess, but, as with severe Wall Street meltdowns of the past, it will lead to new reforms and regulations of the financial markets, and will increase calls for corporate reform, especially the huge pay-packages given senior executives of even failing companies.
It will also have serious political repercussions beyond the immediate financial impact, especially given Washington's decision to intervene directly in the marketplace by subsidizing or taking control of some of these failing firms.
"For opponents of free markets in Europe and elsewhere, this is a wonderful opportunity to invoke the American example," Mario Monti, the former antitrust chief at the European Commission, told The New York Times this week, adding, "They will say that even the standard-bearer of the market economy, the United States, negates its fundamental principles in its behavior."
This will undoubtedly occur here as well, with some justification. The wave of economic deregulation and privatization here over the past 20 years has increased the economic gap between rich and poor to exaggerated extremes, and has also encouraged some elements of the local business community to take excessive risks that imperil the savings of ordinary citizens.
The collapse of the Heftsiba housing company may be small potatoes compared to some of the corporate implosions taking place in the US, but it was spurred by the same kind of over-confident, shortsighted greed that has brought down some of America's financial giants - with similar results for investors and homeowners.
It would be a shame though, if the reaction to the financial crisis, especially here in Israel, turned out to be as excessive and misdirected as the actions that sparked it.
Government regulations should ensure transparency and protect investors from outright corporate negligence and malfeasance without hindering free enterprise; they should reduce risk but not completely eliminate the necessary amount that is an element of any free market.
Capitalist ingenuity and effort should be allowed to receive the rewards due them in an open economy, while the corporate sector must understand it also has a degree of responsibility that goes beyond the next quarter's profits.
In the 1990s, when Israel was still shedding the remnants of a faltering statist economy that was severely stifling this nation's potential for growth, Frenkel was absolutely right to champion fiscal responsibility in the public sector and a loosening of the bureaucratic shackles that were stifling the private sector.
But in this decade the former Bank of Israel governor was, like so many of his corporate peers, blinded by the lure of easy money, and failed to properly regulate his own company's descent in the financial whirlpool now sucking down so many ships-of-economic-state once thought unsinkable.
The pull of that maelstrom will increasingly be felt at our own economic shores, and keeping afloat will require government and business here to heed the lessons of both sides of Jacob Frenkel.