Finally, a beginning

It would have saved a lot of people a lot of money had government action come sooner.

wall street 224 88 (photo credit: )
wall street 224 88
(photo credit: )
Though Finance Minister Ronnie Bar-On has yet to formally unveil the government's limited economic safety net, the depressed corporate-bond market has pulled slightly upward merely on the basis of the psychological boost anticipation of an announcement provides. Yesterday, meanwhile, the ministry, in cooperation with the Bank of Israel and the Israel Securities Authority, did something tangible and positive: making more credit available to banks, pensions and provident funds, all of whom have been having trouble raising cash. Among the measures taken: capital and guarantees worth some NIS 11 billion will be injected into the business sector; banks will get state guarantees to raise capital and expand credit; and taxes on stock market dividends will be decreased by 80 percent. We find it perplexing that it took so long to offer this modicum of reassurance. The delay contributed to depreciation in non-speculative investments and savings. It would have been more effective and saved a lot of people a lot of money had government action come sooner. Because it didn't, some ordinary citizens rushed to redeem their investments, often taking whopping financial beatings. Fund managers were forced to sell bonds in a buyer-deficient market to finance the redemptions. Prices plummeted, triggering yet more redemptions. The problem is not, as some suggest, that corporate bonds are the mainstay holding of most pension, provident and mutual funds. The problem is that intervention should have come by mid-October - not yesterday. With fears eating away at investor confidence amid an international tempest, our bond market collapsed and hardly a household has escaped unscathed. Binyamin Netanyahu was not mistaken when he salvaged the near-bankrupt Histadrut pension funds and exposed them to commercial securities. The state couldn't shoulder the burden, and the economy benefited from the injection of capital. That this policy wasn't reversed in the years since Netanyahu left the Treasury attests to its soundness. Still, when the global economy reeled, steps should have been taken immediately to buttress local markets. The Treasury simply needed to guarantee a given bottom to the market and undertake to purchase whatever bonds would fall below or default, as it did in the case of state bonds in 1996. At the time, that guarantee itself changed the market's direction - at no expense to the economy. TO BE fair, Treasury officials are operating under daunting circumstances. We're in a period of governmental transition. There's no budget for 2009. What if steps seen today as merely psychological wind up costing money Israel doesn't have? As it is, the government deficit is going to increase significantly next year because of the money promised yesterday. And there is an argument to be made that government efforts should be targeted at those who could be out on the street if their pensions and savings evaporate. Still, the failure of the government to act earlier and decisively only exacerbated the situation. Now, with the crisis having deepened, the Treasury is forced to intervene in the market under far more adverse conditions. Moreover, had intervention come when this newspaper called for it, the country would not now be facing the populist threat of Histadrut-led work stoppages. Bar-On and his advisers needlessly transformed a worldwide financial crisis into a local social-welfare issue. The limited safety net proposal they will be presenting to Prime Minister Ehud Olmert when he returns from the United States later today is reportedly aimed at those over 60 years whose earnings fall below a certain level. Meanwhile, the mechanism for such means-testing has yet to be devised. We understand that when people enter the market they take their chances, but these are extraordinary times that demand concern for middle-income savers as well as the less well-off. Had the government sought to avert the market breakdown with a timely intervention, all pensioners, incomes not withstanding, would have been better served. The world financial crisis shows no signs of abating. No one can foresee what further repercussions are in store for Israel. Therefore, we reiterate our call for Bar-On to reach out to the country's political, industrial, business and labor leaders across the spectrum to create a consultative body that will help him steer the national economy until a new government is formed next year.