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Precipitating the next collapse
DANIEL DORON
12/03/2008
Even minority who sustained losses in pension fundswere 'compensated' by strong gains in former years.
The media are replete with predictions about the imminent collapse of our financial system. Pundits warn that unless government bails out savers and savings institutions, we are doomed. Bowing to relentless pressures just before elections, politicians are calling for a "rescue plan" to save our destitute pensioners. What few consider is that the mere anticipation of a severe crisis requiring a massive government bailout can be a self-fulfilling prophecy. And this is taking place at a time when it is highly doubtful whether there is in fact a serious pension crisis, whether a rescue plan is really necessary and whether, if implemented, it could indeed compensate pension holders for present and future losses without spending such huge sums that there would be little left for security, education, health, etc. THE "HUGE losses" everyone mourns developed when some provident funds, which are limited-term savings plans, invested in bonds offered by Israeli tycoons. They raised billions for highly speculative and leveraged real estate deals, mostly in Eastern Europe and Russia, but also in New York and Las Vegas. These bonds suffered steep declines when it became uncertain that our tycoons, who have lost large chunks of their assets in the worldwide crisis, would be able to honor them. Although the rescue plan advocated by many in the media will essentially bail out risky investments made by our banking cartel and tycoons, the pundits insist that it is morally desirable and economically imperative that a government that has putatively pushed savers to invest in a risky stock exchange indemnify them for losses they sustained and even guarantee their future returns. It matters not that such a "rescue plan" will cost many scores of billions which the economy can ill afford, that it taxes poorer pension holders to bail out well-heeled workers and executives who are the main beneficiaries of the hurt provident funds; or that the plan may create a moral hazard, encouraging fund managers to take inordinate risks which will negatively impact future Israeli financial markets at great cost to the economy. HERE ARE some facts: The "pension crisis" fomented by interested parties and their media advocates concerns mostly provident funds and executive insurance plans, mostly of workers with other available pensions, representing only 20 percent of the pension sector. Most workers who are in government-secured pension plans were barely affected, nor were the hundreds of thousands of public sector employees who receive a non-contributory budgetary pension. Even those 20% who sustained losses this year were "compensated" by strong gains in former years, leaving them with an average yield since 2003 of more than 5.9%, hardly "a catastrophe," as the panic mongers claim. The losses sustained by this segment of the pension industry were not the result of the pension funds being thrown into the "stock market jungle" by the financial market reforms which Binyamin Netanyahu launched, as the advocates of the rescue plan claim. The funds were gradually weaned from designated guaranteed government bonds and ushered into the markets in 1980s by no other than Shimon Peres and Avraham "Beiga" Shochat who now use the crisis to pillory Netanyahu. The losses of local provident funds are far smaller than those of their European counterparts, yet no country in Europe dreams of offering a pension "rescue plan." Finally, since 2004, the public's assets have risen from NIS 1.4 trillion to NIS 1.96 trillion, a stupendous gain of NIS 560 billion - this after deducting the recent losses of about NIS 100 billion. Not a bad result from the highly maligned financial market reforms. AS USUAL in Israel there is not only a desire to serve the vested interests of bankers and tycoons behind the campaign for a "rescue plan," but also political motives. To the chagrin of his opponents, Netanyahu and the Likud are gaining strongly in the polls. One of the main reasons for Netanyahu's gain is the public's growing awareness that when he served as finance minister, he saved the economy from a catastrophic Argentina-type collapse and catapulted a two-decade recession into five years of amazing growth. Unemployment fell from 11 percent to less than 6%, with 400,000 new jobs added. The country's credit rating went up, making it much cheaper to service the national debt. The shekel became a very strong currency. All this was accomplished with extremely low inflation, a small government deficit and a gradual reduction of taxes. It stands to reason, the public seems to think, that Netanyahu could probably save the day again in the present crisis. Creating an economic crisis may therefore help to discredit Netanyahu, his adversaries seem to believe. FOCUSING ON a putative pension crisis is dangerous not only because it may precipitate a destructive financial crisis but also because it distracts our attention from the real serious crisis that a worldwide recession is bound to create here. Our economy is highly dependent on exports. A deep world recession that shrinks the purchasing power of our trading partners can have devastating consequences. We must therefore concentrate on making the economy more competitive and productive by breaking up the inefficient monopolies that dominate it and that inflate costs. We must cut damaging regulations, eliminate anti-productive rigidity from our labor markets and reduce taxes and prices - instead of wasting billions on imaginary crises. This country has many enemies, some very dangerous. It can hardly afford self-created crises precipitated for political gain. The writer is director of The Israel Center for Social and Economic Progress.
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