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An electronic board displaying market data is seen at the entrance to the Tel Aviv Stock Exchange.(Photo by: REUTERS)
Middle Israel: Israel’s finest economic hour
By AMOTZ ASA-EL
10/04/2018
Israel might have survived the subprime crisis outstandingly well, but Kahlon's current policies risk the future of its economy.
By sheer coincidence, Lehman Brothers collapsed two weeks before Rosh Hashanah, so by Yom Kippur economic introspection, repentance and remorse seemed to have descended on the entire world.

The entire world, that is, except the Jewish state. Here there was no subprime crisis, no governmental confusion and no financial panic.

In a spectacular inversion of last century’s hyperinflation crisis, when Israel’s economy seemed terminally ill while the rest of the West prospered, now Israel’s was the healthy economy facing a global belt of debilitated economies that sprawled from Japan to America through Germany and France.

True, Israel’s export-dependent economy could not totally avoid the global mayhem; when buyers buy less, sellers sell less. Yet even in gruesome 2009, when the developed economies shrank 3.8%, the century’s fastest-growing developed economy grew 1.1%, before rebounding to 5% in 2010.

The shekel consolidated its status as one of the world’s strongest currencies, while Israeli debt, unemployment, inflation and deficits were among the lowest in the world.

The causes of this success were the perfect opposites of the American fiasco’s causes, as discussed here last week. However, looking to the future, Israel’s current treasurer seems eager to repeat subprime-era America’s fateful mistakes.


ISRAEL REMAINED above the meltdown’s fray because everyone involved – politicians, watchdogs, bankers and the public – were in responsibility mode at a time when others were in the recklessness mode that fed a financial disaster second only to 1929’s.
When America’s leaders created the worst budget deficit in US history, Israel’s actually tightened the fiscal screws.

What began with the Shamir government’s legislation in 1992 that capped the budget deficit at 2.2% of GDP; and what continued in 2004 with then-finance minister Benjamin Netanyahu’s amendment to that law, that spending won’t grow by more than an annual 1% – matured with finance minister Roni Bar-On’s 0% budget deficit in 2007, and refusal in 2008 to join the global psychosis of stimulus spending.

Though the government did earmark NIS 25 billion for that purpose, it never spent one shekel of that package, even while everyone else unpacked stimulus packages ranging from nearly $2b. in Switzerland and $7b. in Holland to $586b. in China and $700b. in the US.

Similarly, the Olmert government resisted pressure to spend billions to bail out tycoons who hoped to use the global panic to renege on repayment of their corporate bonds.

The government’s prudence was matched by the Bank of Israel.

In contrast to the Federal Reserve’s refusal to regulate the markets and preempt their contaminators, then-governor Stanley Fischer ordered the commercial banks in 2007 to no longer let depositors withdraw more cash than their overdraft limits.

In other words, when Americans were encouraged by their leaders to spend and by their banks to borrow, Israelis were told to be careful with their spending, in the spirit of their conduct since the great austerity plan of 1985, which shifted Israel from its socialist past to its capitalist future.

Similarly, when crisis erupted on Wall Street, Fischer helped Israeli exporters – who were challenged by the dollar’s sudden weakness – when he bought daily $100 million for a year. This intervention halted the shekel’s over-appreciation and gradually raised the dollar exchange rate from NIS 3.2 to NIS 4.2.

The central bank’s wisdom was matched by the commercial banks, whose exposure to Wall Street’s toxic assets – most notably Bank Hapoalim’s $1.1b. investment in mortgage-backed bonds – was measured. That’s why no Israeli financial institution collapsed, none needed a bailout, and the banking industry ended 2008 with a net profit.

Most impressively, as noted by economist Sever Plocker, the ordinary Israeli avoided the global financial recklessness, with household debt totaling in 2008 a mere 37% of GDP, as opposed to 70% in Western Europe and 90% in the US.

In the same spirit of frugality, Israeli families were saving more than 10% of their net incomes, while American households’ average savings rate was zero, and British household saving was actually negative.

Governed by a culture of enterprise and thrift that once shaped Protestant-majority economies, Israel’s is today one of the world’s most energetic economies, with per capita foreign currency reserves now the world’s fifth highest, while per capita product, having crossed $38,000, is $1,500 higher than the European Union’s, and set to surpass next decade Britain, France and Japan’s.

THIS IS the backdrop against which a politically cornered and economically overconfident Finance Minister Moshe Kahlon is now undermining Israelis’ hard-earned financial caution, in two ways:

In the housing market, Kahlon is planning to cut the minimum cash required for a young couple’s mortgage from 25% to 10% of the apartment they want to buy, and thus let the banks issue mortgages worth 90% of a purchased flat, rather than the current ceiling of 75%.

In consumer borrowing, Kahlon led the Knesset’s detachment last year of the credit cards from the commercial banks. This means Israelis will be carrying in their wallets multiple, competing plastics that will seduce them to spend money they don’t have for things they don’t need.

That’s how the subprime psychosis began.

The political circumstances are different – Bush and Greenspan were driven by September 11; Kahlon by a populist party’s urge to bribe voters at the economy’s expense – but the financial recklessness is all the same.

Back in 2008 our marginal economy had in Fischer a gutsy authority who showed a path to the rest of the world’s governors as the first of them to cut interest rates when the crisis erupted, and the first to raise rates in summer 2009, a politically impartial pro whom Fed governor Ben Bernanke reportedly consulted regularly, having been Fischer’s PhD student in Chicago.

Fischer’s presence, authority and inspiration while Israel’s politicians, banks and ordinary citizens responded to the meltdown proved priceless. To understand what might have happened in the absence of such adult supervision – look to Moshe Kahlon.

(Second in a three-part series)

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