The origins of the crisis Over the past few decades the world has seen enormous rates of economic growth, and the accumulation of vast wealth. The final victory of neo-liberal capitalism was declared, and claimed to signify the end of history. However, only a tiny minority of people benefited from this growth and everyone else is finding it hard today to endure the current crisis. Many believe the crisis is the result of unsatisfactory and insufficient regulation of the financial system. Others look to blame the unrestrained avarice of financial organizations and those who ran them. Finally there are those who are still willing to accept the traditional explanation that the crisis is the result of the cyclical upturns and downturns common throughout economic history. The fact is that during the past decade, real incomes in the United States failed to grow. The gap between real incomes, on the one hand, and the rises in consumption of goods and services and increases in standards of living, on the other, was financed by the expansion of credit. The freezing of real purchasing power which was unable to cope with the repayment of debt is what led to the creation of the credit bubble. The systems began to collapse. This was not just one more downward slide of the consumption curve. Rather, the growth curve itself was shattered. The cure for the present situation lies in a set of structural reforms - an integrated plan for the resolution of the crisis. This is an emergency in Israel and worldwide. Sedatives won't work. Days of splendor - productivity, growth and wealth The value of world output in 2007 reached $61.5 trillion, an increase of 40% over the $45.2 trillion reached in 2001. During this period new forces of economic expansion entered the market and the awakening and developing economies expanded their share of global production and trade at an astonishing rate. The developing economies of Asia and the countries of central and Eastern Europe grew at an annual rate of between 1.873% and 5.65% respectively. The export of goods from the countries of Asia grew from just under $960 billion in 1993 to over $3.3 trillion 2007. The convergence of the level of output between the developed and the developing nations contributed to the struggle against poverty. According to data published by the World Bank in August 2008, the level of world poverty dropped significantly in the years 1981-2005. Thus, for example, in South Asia the proportion of the population living on less than $1 per day fell from 43% in 1990 to 30.8% in 2005. This occurred despite the growth in the gap between the developing and the developed countries, and between the world's poor and the globe's top decile. The world today is experiencing progress in every important area related to human activity. As a result of the rise in global productivity it would be possible today, as it never has been in the past, to meet the needs of the world's population. The era of economic glory was based on the neo-liberal ideology of the so-called "Washington consensus," characterized by zealous determination to deregulate and privatize on an elitist basis, as well as by faith in the virtues of free markets. Those who were not worthy, who had failed, it was argued, will disappear from the world through the force of the market, in what was regarded as a creatively destructive process. The freeing of the economic and financial markets from regulation brought on a flowering of the free market. Such industries as insurance, financial brokerage, commercial banking, investment banks and financial middle-men, were able to work together in the different areas of economic activity. After 1980, the value of real property, shares, debentures, and other financial assets rose beyond measure. Financial sector shares made up 5% of US stocks in 1980, and rose to 23.5 % last year. Systems of insurance engineered through futures contracts, CDS, foreign exchange hedging and other complex financial instruments created a market which, together with what is known as securitization, worked to divide and disseminate risks. Deregulation reached its height when the US Congress in effect revoked the Glass-Steagall Act of 1933, which had separated commercial banking and underwriting in order to reduce the risk of the banks as receivers of deposits from the public. One effect of financial deregulation in the US over the past two decades was to create a secondary mortgage market. Banks were able to package together and present as "one piece" mortgages that were, in fact, different in terms of both risk and yield, and sell these packages to investors all over the world. These procedures, together with an easy interest rate environment in the US, led to a huge increase in demand for property by households. In 2005 the proportion of households in America owing their own homes rose to nearly 70%. Every percentage rise in home ownership meant about a million more owner-occupied homes in the US. This demand lead to a dramatic increase in property prices. The work of construction was not to be a source of savings but rather an impetus to the financing of people's standard of living through the use of the credit card. According to Ben Bernanke, Chairman of the US Federal Reserve, the standard of living of households (measured by real consumption per person) is 35% higher today than it was in 1995. The data shows that during this period there was unprecedented global growth, an increase in the standard of living of households, and a huge increase in the profits of companies. However household incomes did not rise. For approximately 80%of households, cash incomes did not rise at all, and in real terms incomes actually fell. Several factors combined to erode blue-collar wages and increase the power of the wealthy. Globalization and improvements in technology meant increasing use of low-cost labor in the East, and that, together with neo-liberal political developments, led to the decay of labor unions. The free market ideology also resulted in tax changes that favored the elite. Increases in household consumption were financed in the main by credit, easily obtained by unrealistic rises in property prices, and by the willingness of banks to offer high-risk mortgages to maintain the "sanctity of profit." The result was a global consumption bubble that had no economic basis because it was not accompanied by rises in real incomes. The borrowing of households in the United States and Europe during the last decade reached levels of financial risk that were substantially higher than was desirable or acceptable in view of the constant or falling disposable income. The rise in debt relative to household incomes has far reaching macro economic implications. Today, households are more affected by changes in interest rates and in the level of their incomes. These implications were apparent by the year 2003, and became more and more severe as time went by. As a result of the huge growth in the countries of the East, the demand for goods rose, as did their price. This rise in price continued to erode the real incomes of households in the developed countries. Neo-liberalism, in a conscious systematic way, attempted to have the best of all worlds. Real incomes, frozen in the West, were accompanied by very low incomes in the East; plentiful cheap money for expansion, and finance with high levels of leverage totally outside any form of regulation; moving the burden of taxation from the upper deciles to the lower deciles; revoking transfer payments and the deregulation of health, education, public housing, and services to the aged. All of this brought about the destruction of purchasing power and the collapse of the entire market. In the United States and in the West in general, interest rates, and interest payments by households, began to rise and the prices of property began to plunge. In the absence of disposable incomes and savings, it became difficult for householders to improve their financial balance. This situation led to a global financial slump as the rate of bankruptcies in the US increased dramatically. All this resulted in major transfers of wealth from households to those providing credit. The brilliance and glitter of those who stood at the top of the economic tree blinded everyone else to the fact that the root was rotten. The neo liberal system destroyed itself. To save this system now at the expense of the public, without giving state assets to the wide public by way social privatization, would be an act of grotesque cynicism. The collapse in property prices, that had served as securities for the mortgages and other borrowings, exposed the lack of legitimacy of the system. They did not collapse like dominoes, but rather imploded in one fell swoop. It is truly a tragedy. Huge wealth has been destroyed by an outdated economic system and an elitist conservative ideology. It was not bound to happen; there is no iron law that doomed the system to collapse. It collapsed because the ideology maintained its grip on a system of wealth production that it had done nothing to create; because of the actions of men who created political and legal systems that conferred the greater part of the increase in wealth on 10% of the population and a much smaller slice to the rest. It is this that has proved destructive to a free and creative economy. Has Capitalism collapsed? Neo-liberalism is an elitist ideology whose time has clearly passed. Far from automatically preventing the crisis, it has in fact caused it. The task of the old capitalism of the 20th century was completed long ago, and its economic and legal systems are incapable of meeting the needs of the new economics. The neo-liberal market is based on risking other people's money. The traditional historical economy was one in which owners were closely involved in the control and management of their enterprises. By contrast, the new capitalism separates ownership from control. Capital is provided by the savings of millions of households, and is invested by the professional managers of financial institutions in enterprises controlled by other professional managers. Those who provide the capital, the householders, have no idea of the profit that is being made with their money. Deregulation intensifies this state of affairs by putting almost complete control of the wealth and savings of the public into the hands of the controlling elite. The arrangements that were originally set up for management and supervision of enterprise have lost their significance and their practical influence, in part because they are no longer able to bridge the enormous gap between the controllers of wealth and its true owners - savers and households, "the little people" who are the real creators of equity, and whose interests no institution or organization truly represents. The uncurbed credit that is provided through the financial system is a fundamental part of the structure of the modern economy. Substantial credit strengthens the ability of its recipients to make purchases beyond those supportable by their real incomes, and this enables profits to continue unchecked. The almost inevitable result is the creation of an almost endless stream of profit and wealth to the providers of credit, and a significant and long term fall in the bargaining power of those who receive it, the small consumers and their households. In spite of the development of modern capitalism in the world as a whole and even more so in Israel, states and their governments still play a major role in the economy. In Israel more than half of all economic activity is carried out by or for the government. Thus in practice a modern market economy is very different from the system envisaged by economic theorists. Rather it is a combination of the centralized and highly concentrated state economy with the external private institutions of the market. The assets of the "little people" are eroded by the elitist privatization. The view that private property bestows sovereign rights on its owner is not valid today, because of the involvement of the state and its regulatory systems in all aspects of economic life. The state's laws, regulations, decrees, permits, licenses, and prohibitions strengthen the control of the state and minimize the possibility of private sovereign activity. The state is, therefore, a state of regulation and has so been named. And the question becomes: is this to be regulation by and in the interests of society, or the elite? The wealth of the state is in practice of little benefit to the individual citizens. The state possesses many physical, financial and intellectual property assets. It owns natural treasures, lands, infrastructure, enterprises, and public savings funds. It has the power to make regulations and to grant licenses, to legislate and monitor and control. But in practice the individual members of the public on whose behalf the state operates derive little benefit from these possessions and powers. Many of the people continue to suffer from poverty, even though they are supposed to profit from the fact that the "assets" are controlled by the state and are not in private hands. The solution lies in social privatization. Social privatization means transferring assets that are owned by the state to the ownership of people who are without means or to the general population. That is to say a re-division of the wealth that has been accumulated and controlled by the state, transferring it to groups within the population who have no assets, and bestowing property rights on these groups. This would use the regulatory power of the state to confer wide ranging rights; the right to accommodation, public health, education, leisure, and progressive taxation. The concept of social privatization is comprehensive and sweeping, without discrimination or distinction. Social privatization would make possible the distribution of wealth not yet distributed, rather than the redistribution of existing wealth. The effect therefore will be an increase in the numbers of those who own property - the democratization of property, rather than its transfer into the hands of the few. All this would be done by creating new property rights that have not hitherto been recognized. These new rights will develop new strata of society to become part of the productive population and will enable other social groups who today are excluded from participating and benefiting from the distribution of wealth to do so. This new property owning class will use the assets that have been privatized and transferred to its ownership in order to join up with the creative class and be active in the new property systems. The historical dilemma of the 20th century lay between nationalization as the policy of the left and elitist privatization by the right. The reform suggested here is a way through the center. Social privatization would not leave the majority of the assets under the control of the state bureaucracy, nor would it transfer assets solely into the hands of the very few, as is the case in all forms of elitist privatization. Rather it would transfer the assets from the hands of the state - which has a fiduciary obligation to promote the good of the public - to the public itself. Any other form of privatization ends up by being nothing other than accumulation. A solution through social reforms The problem of inequality in our era is not merely one of morals or ideology. It has become a problem in the struggle for the very existence of the new economy. It is simply impossible to develop the potential of the new economy to deliver an endless flow of goods and services unless adequate purchasing power is available to create effective demand for these. The neo-liberal ideology has proven incapable of doing this. It has collapsed because its contribution to the creation of wealth was to freeze incomes in the West and take advantage of cheap labor in the East. The consequences have proved fatal for the ideology itself. What is needed is a change of direction. Economic growth must be based on increasing household incomes and purchasing power in direct proportion to productivity and growth. The increase in incomes and purchasing power of households can be achieved by the creation of a base of assets for households by way of social structural reform that will increase disposable incomes and create the new and real demand. The crisis has sharply revealed the cause of the illness and not just its symptoms. The problems lies in the distribution of wealth - not existing wealth, but new intangible wealth produced by regulation, and the wealth that is in the hands of the state. Reforms in housing and urban renewal The suggested structural reforms can extricate the Israeli economy from recession, broaden and deepen the forces in the market that up till now have not been operating, narrow the governmental systems in the Israeli economy and, together, raise the standard of living of most households who live close to the poverty line. Societal privatization relates to structural reforms in education, health and housing by creating statutory legal and economic infrastructures that would make these services broadly attainable. The privatization of the Israel Land Authority by the purchase of property for all leaseholders who reside in neighborhoods eligible for attainable housing and the creation of plans for the democratization of land (assets) would constitute a reform in the systems of planning by privatizing the component of planning so as to bring about social regulation and make it a central foundation of its functioning. Societal privatization in the field of housing relates to public housing and urban renewal, the rehabilitation of neighborhoods and attainable accommodation. The common link to the three proposed reform is the bestowal of wide ranging rights to a strata of society with lesser ability who live in poor neighborhoods in public housing and are in need of attainable housing. In the past decade not only has nothing significant been done in this connection, but in fact the terms of entitlement to accommodation and mortgages have worsened, rehabilitation of the neighborhoods has been sparse and attainable housing has been presented as an unreachable objective. Urban renewal Urban renewal relates to some 800,000 housing units, representing Israel's poor neighborhoods, in which 2.5 million of the country's citizens (about a third of the population) live. As someone who served as the chairman of a committee on this subject, it would seem that although the issue has not been formally agreed to, agreement does exist between the management of the Israel Lands Authority, the budgetary section of the Finance Ministry and the professional leadership of the Ministry of Housing and Construction that there is a need to turn these distressed areas into the focus of urban renewal. The neighborhoods which the law would apply to would be signposted and declared in the law within the framework of which it will be possible for those living in the neighborhoods to renew property they are holding, together with a special regime which within a short fixed term of time will bestow to these neighborhoods wide ranging building rights in every possible place or alternatively to opt to commercialize the entitlement by transferring it or by land completion. The activation of the plan here and now can alter the face of many of Israel's towns and remove Israel's poor from their poverty in real time. The suggested law for the urban renewal of Israel 2008 is on the desk of the minister of housing, who is also chairman of the management board of the Israel Land Authority. The real added value to the 800,000 housing units is judged today as being in the sum of over $100 billion dollars, calculated on the basis of $150,000 per unit, which together with the bestowal of the property and the increase in the right to development, represents a sum three times that which is recognized today by the Ministry of Housing and Construction. Attainable housing Attainable housing is housing that conforms to two criteria - to wit that the overall (gross) price of the apartment, the initial investment required for its acquisition (down payment) and the mortgage required for its acquisition are compatible with the ability of the acquiring family to invest and repay. The competition is based on obtaining a minimal price for the person seeking the housing and minimal repayment of the subsidized mortgage based on the repayment levels being increased as the buyer becomes more and more established. The suggested basis for the activation of a program of achievable housing must be the available reservoir of available land at the disposal of the management of the Land Authority and the reservoir of housing in the private sector that is searching for buyers in a time of recession. It should be noted that in the US since the time of the New Deal, three such authorities and companies have been established which managed to turn housing on the verge of collapse into attainable accommodation. In an approach by the Ministry of Housing to the Economic Committee of the Knesset in March 2008, the Ministry pointed out that in the year 2003 grants for the acquisition of an apartment were discontinued, and that this severely damaged the ability of poor families to own their own homes. In the same way, from 2005 and onwards assistance programs were reduced because eligibility was limited. Up to that time, the definition included everyone who was homeless. In the light of the revocation of entitlement to grants, there was a fall of about 50% in the number of those who got mortgages. In real terms, the reduction was even greater given the increase in the size of the population. These facts justify the need to put such a plan into action precisely in these times. Such a plan could lead to the provision of 20,000 housing units per year for a period of 10 years and would provide housing for 10% of Israel's citizens. This would increase national ownership of housing and create family wealth that can be passed on to future generations. It will reduce or even prevent the rise in house prices after the crisis, will stimulate economic activity and provide employment in addition to achieving the primary objective of supplying attainable housing. Public Housing The government of Israel owns a pool of 80,000 public housing units lived in by the poor. Many of these are in poor, run down neighborhoods. Member of Knesset Ran Cohen proposed a law that would entitle those living in public housing to purchase their homes over time but, as is well known, it failed. The major fault in the proposed law is that its gives rights only to the existing property, and there is no scope for development or additions. This would hinder the process of urban renewal supported by the Israel Lands Authority. What is needed is a law that is encouraging to public housing dwellers, and that would provide an economic impetus to the reduction of poverty and urban renewal. This plan would transform deadwood properties that are a focus of poverty into $5 billion of social property. Achievable education through positive discrimination Knowledge has become one of the most important economic resources. Information is the raw material that enables the process of development of the new economy. Access to information in real time, from every place to every place, in every field in relation to every area, creates an era of opportunity. Human capital is the most important form of wealth in the modern world, but its accumulation requires quality education, including higher education. Vocational education is no longer a matter of providing individuals with the ability to perform like Charlie Chaplain on an assembly line. Education is the means by which a pool of human wealth is created for the benefit of individuals and of society. It enhances the possibility of acquiring and enjoying property, which in turn provides a base for families to foster development in a way that fits the qualifications, talents, and inclinations of their members. Education should aim to instill values related to creativity, curiosity, ambition, and optimism. If individuals are to compete effectively and fairly for places in the national and global economy, in the society, in the country, and in the community, it is essential that education at all levels must be free. Further, for the children of the neglected strata to achieve this, there must be positive discrimination in their favor. In order to provide higher education at this level precisely to the neglected strata, the state must ensure that steps are taken that involve positive discrimination vis-a-vis the children who come from those strata. After all, if education and training were to be provided equally, that would mean discrimination by implying equality between groups of people that are fundamentally unequal. True fairness in education and learning would require a sharing of the wealth that is in the hands of the state. Increasing the disposable incomes of the poor by reducing their expenditure on education, and making more of their income available for saving and increased purchases, would be a good start. Reforms in health services The existing law provides a reasonable framework for ensuring health services; its intention was to separate the entitlement to health services from the ability to pay. Payment was to be through progressive taxation (from each according to his ability) and medical services were to be given on the basis of medical need (according to his need). However, the spread of neo-liberal policy has resulted in cuts in the health services, and many specific medical services now require payment at the point of delivery in addition to health taxation. Despite changes in medicine. in the technological systems connected to medicine, in specialization, and in pharmacology, there has as yet been no reversal of the changes wrought by the neo-liberals. Raising the payments to be made by those in need of medical services has drastically subverted the objectives of the law. The structure of the Israeli health system must be reformed so that every citizen can have access to medical services, medication, and treatment financed solely by a progressive health tax. It is clear from many research projects that the present situation in this field operates in a way that is contrary to the intent of the law, and can only be described as a kind of elitist privatization. This crisis creates an opportunity for an anti-elitist revolution. We need a new ideology for the new economy, an ideology that will further the interests of the productive classes, the middle class, the centre (both in political and social terms), and those interested in taking up their part in the new property - an ideology that will promote the elimination of poverty. A new economy cannot solve its problems using old methods. The solutions that we are proposing are new solutions for a new economy. THE STRUCTURAL reforms are significant and their results must be expected to materialize over the long term. They are intended to provide solutions to a deep structural crisis that is likely to bring about the collapse of many households. They will require both national agreement that they are necessary, and a national covenant to put them into effect. A campaign for reforms such as these can be mounted only in the framework of a national unity government. The need for reforms is urgent, and they must be carried out now. Structural reforms such as these cannot be carried out except when there is no other option. The Washingtonian consensus that expressed the neo-liberal ideology was the result of a realisation that it was not possible to continue in the way of the past, and that it was necessary to face up to the crisis. The State of Israel must take part in the approach that is taking shape worldwide and in particular with the coming into office of Barack Obama. Given global interdependence, the only way to take control of the situation is through international cooperation and a new form of global cooperation. The Bush administration shifted the relative burden from the top deciles to the poor, but the new administration will try to implement reforms that will not only produce temporary stability but will provide long term economic protection to most of the population that was not able to participate in the joys of the golden age. Can the government of Israel be satisfied with merely stabilizing reforms rather than structural reforms? Only structural reforms will provide relief for the majority of its citizens. It is they who have been bearing the burden of the temporary solutions thus far offered. Only comprehensive plans, drawn up within the framework of a national consensus, can provide lasting solutions. The writer is the founder of S. Biran & Co., one of Israel's leading law firms. Translated from the Hebrew by Dan Gillon

There is a solution

The financial crisis offers an opportunity for structural reform. We must not spurn it.