Netanyahu's partners are brewing a subprime crisis - analysis

MIDDLE ISRAEL: Lurking behind a financially dangerous financial-aid bill is an exciting economic controversy between the new coalition's ultra-Orthodox and modern-Orthodox members.

THE KNESSET Finance Committee’s incoming chairman, United Torah Judaism’s Moshe Gafni, presents an anti-economic bill that challenges the capitalist zeal of incoming finance minister Bezalel Smotrich. (photo credit: MARC ISRAEL SELLEM)
THE KNESSET Finance Committee’s incoming chairman, United Torah Judaism’s Moshe Gafni, presents an anti-economic bill that challenges the capitalist zeal of incoming finance minister Bezalel Smotrich.
(photo credit: MARC ISRAEL SELLEM)

Money, said Henry Fielding, is the fruit of evil, and also its root.

A believing Christian, the famous novelist was feeding on an ancient monotheistic tradition that viewed financial success with suspicion and made all three faiths forbid lending at interest.

The reality was, of course, more complex. In ancient Israel, there were those who turned the Temple into a financial nexus – and those, who scolded them, including one Jew who overturned the tables of the moneychangers who worked outside the Temple.

Christianity inherited this Jewish dissonance, as the same Vatican that forbade lending for profit created the world’s biggest real-estate empire.

When Protestantism emerged, one of its prophets – John Calvin – not only reconciled money and faith, but combined them, claiming that God rewards financially those who please Him religiously. It was a revolutionary theology that later inspired a famous thesis that linked the rise of capitalism to the rise of Protestantism. 

 Israelis protest against the soaring housing prices in Tel Aviv and cost of living, on July 2, 2022.  (credit: TOMER NEUBERG/FLASH90) Israelis protest against the soaring housing prices in Tel Aviv and cost of living, on July 2, 2022. (credit: TOMER NEUBERG/FLASH90)

In Judaism, one major rabbi (Shlomo Ephraim Luntshitz, 1550-1619) diagnosed the wealthy as inhuman, and claimed, like Fielding, that money will corrupt anyone because “all wealth causes arrogance.” 

In recent years, an opposing school of thought emerged in Israel – Orthodox Jews who think Judaism is actually capitalistic.

As first articulated by philosopher of Jewish law Yosef Yitzhak Lifshitz (“Foundations of a Jewish Economic Theory,” Azure, Autumn 2004), this school debates the Zionist thinkers who identified Judaism with socialism. “The limitation of individual property rights and the dream of economic equality are alien to both the laws and the spirit of Judaism,” he wrote.

Such thinking inspired the rise of a think tank named Kohelet, which welds Judaism and capitalism, promoting, among other goals, free enterprise, small government, low taxation, and deregulation.

It’s a politically exciting, if intellectually unconvincing, departure from religious Zionism’s earlier leaders who embraced socialism, and in fact made a point of heading what back then was called the Welfare Ministry, a position through which they built much of Israel’s welfare system.

This theological evolution was esoteric until last Monday, when the Knesset Finance Committee’s incoming chairman, United Torah Judaism’s Moshe Gafni, presented an anti-economic mortgage-cap bill that challenges the capitalist zeal of incoming Finance Minister Bezalel Smotrich, an enthusiastic disciple of Kohelet.

Whether Smotrich will now prove consistent remains to be seen, but with or without him Gafni’s effort should be stopped in its tracks.

Israel's housing crisis

ISRAEL’S HOUSING crisis is massive. Over the past 14 years, apartment prices rose on average 177%; last year alone they soared 20%. Buying an apartment demands the equivalent of 176 average monthly salaries, meaning nearly 15 years’ work, according to Tel Aviv University economist Danny Ben-Shahar. In France, by contrast, it takes 90 salaries, and in Switzerland 42.

This already harsh situation is exacerbated by recent months’ rise in interest rates, as the Bank of Israel battles the global inflationary pressures caused by the war in Ukraine. The prime rate was raised six times since April, and thus traveled from 0.1% to 3.25%. Homebuyers’ monthly mortgage repayments thus rose by an average of NIS 745, a very serious burden for much of the working and middle classes.

Responding to this, Gafni tabled a bill that seeks to cap interest rates. If rates rise by 1 annual percentage point, he suggests, the banks will be forbidden to raise rates by more than 0.5%.

This is voodoo economics, worthy of an ultra-Orthodox politician whose attitude toward money, work and wealth is fatalistic, and whose reflexes are sectarian.

Financially, such market intervention will not work. Mortgage rates, like the price of any product, reflect a balance between supply and demand. Attempts to ignore the markets and set prices instead by bureaucratic command will result in the real price’s emergence in other ways.

If shoe stores were told to cap prices, then the buyer, the shoe and the real price would meet in the black market. Similarly, if banks are commanded to cap mortgages’ adjustment to changing interest rates, then the banks will raise a new mortgage’s starting rate. Contractors, at the same time, would raise apartment prices, and thus collect the cash Gafni hopes to place in homebuyers’ pockets. 

Price interference doesn’t work. That’s why in 1985 Israel abolished the many subsidies it had for basic foods, realizing they fed the hyperinflation that nearly destroyed our economy.

That’s why the Bank of Israel’s rate rises this year are working. The Treasury reported this week that new apartment sales plunged in October by 65% compared with the same period last year. That means that housing prices will soon decline as well, the textbook effect of a good central bank’s healthy treatment for an overheated market. It’s basic economics.

The markets don’t need Gafni’s help, which is anyhow driven not by a concern for the broad public, but by a quest to pamper his constituency. That’s why his bill is limited to poorer homebuyers who get mortgage-payment assistance from the Housing Ministry, a largely ultra-Orthodox population whose difficulty in buying apartments is the market’s way of telling them what Gafni won’t tell them: go work.

Disturbing the housing market’s work can generate epic disasters. In America, the government’s inaction resulted in high-risk buyers taking mortgages they could not repay. The result was the 2008 subprime crisis and financial meltdown.

In Israel, the government’s failure is not in the financial side of the industry, but in its infrastructure side, namely, the ongoing failure to sell real estate in, and build fast public transportation to, the largely empty South. That’s what Gafni, Smotrich, and the rest of the incoming coalition should do if they want to bring down housing prices. Don’t finagle with pricing. Increase supply.

Storming the moneychangers, Rabbi Gafni, doesn’t work. Ask Jesus.

The writer, a Hartman Institute fellow, is the author of the bestselling Mitzad Ha’ivelet Ha’yehudi (The Jewish March of Folly, Yediot Sefarim, 2019), a revisionist history of the Jewish people’s political leadership.

The Finance Committee chairman’s mortgage bill is different from what caused America’s subprime crisis, but its damage might be similar.