Into the abyss

For the last four months, Israel has had no government, and hence no economic policy. With its usual anti-Semitic zeal, the world has doggedly refused to go into recess during this period of Israel’s self-imposed paralysis. Instead, it has plunged into severe recession. How severe is impossible to convey in words, because the entire inventory of both professional terms and media hyperbole has long been exhausted. The best visual presentation I’ve seen anywhere is the summary of US economic data provided by the Calculated Risk blog, at

CR presents a series of stunning graphs, all of which display what he accurately calls ‘cliff-diving’ – meaning data showing a sector that is in the process of falling off a cliff. The cumulative message is unmissable, even by economic illiterates and died-in-the-wool optimists: the US economy as a whole fell off a cliff in the fourth quarter of 2008, and continued plunging in January 2009. So, indeed, did the rest of the global economy; suffice it to say that Japan and China, respectively the second and third biggest economies in the world, are both sinking fast, each in their own way.

The Israeli economy, too, collapsed in recent months. After deteriorating slowly for most of 2008, the rate of decline in the last two or three months of the year can only be described as horrendous. In other words, not only did the global economy continue its plunge into the abyss, it took us along with it. None of this, however, was seen as cause for alarm, let alone action, by the caretaker government. What precisely it thought it was taking care of is a mystery, but as far as managing the economy is concerned, it was out to lunch. It did leave behind someone to mind the shop in its absence – Stanley Fischer, Governor of the Bank of Israel, and regarded by government and opposition alike as a demi-god imported from the highest echelons of Washington and Wall Street. As such, Fischer is beyond criticism by mere ministers, or even regular mortals. Never mind that his economic ideology is in ruins. Never mind, too, that the set of policies he helped to conceptualise in academia and formulate at the IMF – the ‘Washington Consensus – are now recognised as fundamentally flawed and lie in theoretical intensive care and in practical ruination. Never mind, even, that Fischer’s management of monetary policy here has been characterised by repeated and pointless zig-zags for years, giving way to outright panic in recent months, as he cut interest rates time and time again. Never mind, finally, that Fischer’s manic campaign of interest rate cuts has been met by absolute apathy on the part of the commercial banks, which have responded by raising their borrowing rates to customers and have failed completely to react to the latest (Jan 26) 75 basis point cut by the central bank.

Yet Fischer, at least since September, has pointed monetary policy in the right direction. But, as his erstwhile student Ben Bernanke has discovered in Washington, monetary policy is a dead horse. Bernanke was able to persuade the Bush Administration to use fiscal policy as well in the fight to halt, or at least slow, the slump; the Obama Administration will now double and redouble those efforts. But in Jerusalem, Fischer is the only economic policy player on the field. The 2008 government budget, which is the primary instrument of fiscal policy, was formulated in mid-2007 and is, therefore, a relic of a bygone age, as relevant to today’s circumstances as arming the infantry with flintlock muskets.

That budget, still in force until a new one is legislated, has imploded because tax revenues are collapsing. Exports are slumping too, as are imports. The economic erosion is so rapid that the Bank of Israel cut its growth forecast for 2009 from 1.5% to a negative 0.2% between November and January; further downgrades are certain. Yet neither the government nor the Treasury has managed to do more than throw a few bones at the sectors yelping most loudly for succour – a few hundred million for high-tech, a bit more for construction. The shekel exchange rate, which Fischer allowed to rise so far and for so long because of his dogmatic commitment to non-intervention in the omniscient markets, has finally regained its level of late 2007 – the epitome of ‘too little and too late’.

But worry not, all will be well soon. Next Tuesday a new Knesset will be elected. A new government will quickly be formed, at its centre a party with a commanding majority and a clear program of what to do and how to do it. The next prime minister and his well-known and highly-respected candidate for finance minister have displayed throughout the campaign a deep and thorough understanding of the challenges facing the country. They have won over the electorate by delineating new and relevant policies that can be quickly implemented and that, without doubt, will restore the confidence of households, businesses and investors alike.


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