Steady Hand on the Tiller (Extract)

By SHLOMO MAITAL
Extract from a story in Issue 18, December 22, 2008 of The Jerusalem Report. To subscribe to The Jerusalem Report click here. On Thursday, November 20, the Tel Aviv Stock Exchange had a nervous collapse. No other phrase captures what happened. A large investment house, Excellence, issued a sell order for 35.5 million shekels (about $9m.) worth of shares at 5:05 p.m., close to the day's end of trading. In a large-volume stock exchange, like New York or London, this would be a drop in the bucket. But Tel Aviv's exchange has relatively small trading volume in normal times, and volume has been even smaller lately in the down market. The sell order caused the Tel Aviv 25 stock index to plummet instantly by 11 percent, triggering a "stop trading" order (initiated whenever the index falls by 8 percent or more). Trading resumed later and stocks rose; the Tel Aviv 25 index ended the day down 4.9 percent - bad, but not catastrophic. That tumultuous 90 minutes on the Tel Aviv exchange typifies how hysteria can make a bad situation far worse. And it is happening all over Israel and the world. Here is one small example. The bonds of an Israeli company, Makhteshim Agan, world leader in crop-protection chemicals, are selling at a discount that implies a perceived 30-40 percent chance of default. The true odds are perhaps 1 percent. Why? Sheer panic. Many other Israeli corporate bonds are similarly irrationally discounted. My friend Brendan runs an Irish-British consulting firm. His hobby is sailing. Last fall, he sailed his yacht across the Atlantic. Often he encountered bad weather. But his hand on the tiller (the lever attached to the rudder that steers the boat) was steady, keeping the sailboat heading into the wind to avoid capsizing. Brendan runs his company this way, too. Instead of firing people like everyone else, he slashed his own salary, then asked his workers to take a smaller cut. All but one agreed. I have lived through 10 recessions and have studied all of them, as an economist. This one is different. It was born with an amplifier - bad news is made a million times worse by excessive media fanfare, using rhetoric like tsunami, earthquake, disaster, collapse, 100-year flood. The fear, amplified by the media, creates the very result we seek to avoid - a "doom loop" feedback. I speak often with Israelis who have already sold, or will soon sell, their pension and provident fund assets. They do this at or near the bottom of the decline. They do it even though Israel's provident funds rose by 44 percent between 1998 and 2006 and, since then, have fallen on average by less than 11 percent. Why? When "New" Histadrut labor federation head Ofer Eini threatens a general strike unless the Finance Ministry guarantees all the pension funds, people assume their pensions are in immediate danger. Drop the "New," Ofer; it's the bad old Histadrut reborn. You are sowing panic for political gain. And you are not alone. Where are our leaders, with a firm hand on the tiller, who can speak credibly and calmly? It is said that Israel enters the recession with a strong economy, after five years of 5 percent growth. This is good. But it is very bad that we are now in an election campaign. Everything said between now and February or March by our political leaders will be interpreted as vote-getting self-interest. The writer is academic director, TIM-Tel Aviv. Extract from a story in Issue 18, December 22, 2008 of The Jerusalem Report. To subscribe to The Jerusalem Report click here.