To bail or not to bail

Why not have the tycoons sell shares to raise capital to repay their bonds, even if this means losing control over some of their enterprises?

Lev Leviev 88 248 (photo credit: Ariel Jerozolimski)
Lev Leviev 88 248
(photo credit: Ariel Jerozolimski)
The government must bail out those of our tycoons who cannot redeem NIS 100 billion worth of bonds, several leaders of our economy urged Prime Minister-designate Benjamin Netanyahu recently. Otherwise, they warned, these tycoons will go under and our economy will disintegrate. A growing campaign, led by seemingly disinterested public figures and prominent media commentators (some known for their consistent advocacy of the Hapoalim-Leumi bank duopoly), are urging the government to spend billions of shekels of taxpayers' money to bail out some of the country's billionaires. These "tycoons" financed very speculative, highly leveraged real-estate deals in Eastern Europe and Las Vegas with money raised here. Now that the deals have gone sour, the taxpayer is asked to rescue them. True, if the tycoons default, the consequences may be harsh, but a massive bailout may have considerably worse consequences. Spending billions on a bailout will push the government deficit to untenable heights, forcing it to print money and driving up inflation. It would probably lead to stagflation - a destructive state from which Israel emerged in the past only with extreme difficulty. Another bailout scheme, in which the Bank of Israel buys corporate bonds, is tantamount to government lending money to the private sector. It would also increase the government debt, which already amounts to NIS 500 billion (without counting the NIS 500 billion the government owes for underbudgeted pensions). Both measures will shift resources from the productive private sector to a wasteful public sector. They will drive up the price of money and credit, making them too costly for entrepreneurs, and will therefore curb growth. In short, the cure may prove worse than the disease. SO WHY NOT grab this opportunity to heal the economy by breaking the stranglehold monopolies have over it through the tycoons' vast holdings? Monopolies and duopolies curb competition, promote inefficiency and raise the cost of doing business. Why not have the tycoons sell shares to repay their bonds, even if this means they lose control over some of their enterprises? Why force the taxpayer to rescue owners and managements that failed so miserably? Shrinking world demand may have a devastating impact on the export industries that make up such a large part of our GNP. To survive, Israel will have to compete fiercely, and it will not be able to do so unless it becomes far more efficient. To promote efficiency, our economy must be structurally overhauled and the great concentration of economic power (and political clout) in the hands of a few tycoons must be diminished. As Galia Maor, COE of Bank Leumi noted: "Only in time of crisis can one carry out reforms and structural changes... we must seize the opportunity." Those calling for a government bailout point to similar steps taken by the US. But luckily the crisis here is different from that in America, where the government is dealing with a deep crisis of confidence that threatened the US financial sector with collapse, as well as the burst of a huge mortgage bubble that saw asset values nose-dive. Nor is it certain that steps taken by the desperate Americans are going to work. CONTRARY TO WHAT many anti-capitalists in our media, academy and elites want us to believe, the current financial crisis was not caused by the free market and greedy capitalists. Like all major economic crises, it was caused by massive government intervention that perverted markets. First, the Fed created massive amounts of cheap credit. Then the Clinton administration mandated the sale of tens of thousands of worthless mortgages. It is doubtful that yet more massive government intervention - politically tainted, fumbling and inefficient - can repair the damage done by government in the first place. There are many voices in America objecting to bailout schemes, though our media do not report it. Recently, 200 prominent economists, including Nobel laureates, took out ads in major US newspapers declaring that "notwithstanding reports that all economists... support a big increase in the government burden, we do not believe that more government spending is the way to improve economic performance." These economists cited the failure of presidents Herbert Hoover and Franklin Roosevelt to overcome the Great Depression with increased government spending, and the "lost decade" in Japan caused by a similar failure in the 1990s. "As such, it is the triumph of hope over experience," they continue, "to believe that more government spending will help the US today. To improve the economy, policymakers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth." This is even truer for Israel, where such impediments are the rule rather than the exception. Removing bureaucratic constraints on land, labor and capital can create a great spurt of growth. Look at how impressively recent financial reforms affected growth here. Completing the financial reforms and launching more is the best way to handle the crisis. Luckily, there are indications that this is what Netanyahu intends to do. The writer is director of The Israel Center for Social and Economic Progress.