The entire system is collapsing

Prime Minster Benjamin Netanyahu at coronavirus aid press conference / Photo: La'am

Our economic leaders show no grasp of the scale of the crisis or of what needs to be done, warns Avi Tiomkin.

Israel has the advantage of being a fairly small economy with advanced technology and huge foreign currency surpluses. Aggressive and historically unprecedented action can significantly reduce the danger of real destruction of the economic and social system. It is frightening to see the prime minister, heads of the Ministry of Finance, and the governor of the Bank of Israel and his staff almost completely paralyzed, with no understanding of the scope of the current crisis and the abyss before us.

This lack of understanding is not surprising, because these people and all of their leading assistants are almost all academics. They live and breathe fiscal and economic models that are no longer valid, especially now. This is especially clear from the way in which senior Ministry of Finance officials and the governor of the Bank of Israel have previously operated in the economic sphere, for example in their incompetent management of the country's foreign currency reserves.

What is misleading about the coronavirus is the fact that the disease is generally mild and the mortality rate is relatively low. The real problem is the rate of infection, even if the patients with the disease are only slightly or moderately ill, and most of them recover. Because of the speed of infection, any country that fails to contain the disease will be effectively shut down and out of control, because of the spiraling number of patients, who of course will no longer be able to work. Furthermore, the health system is liable to be overwhelmed. Everyone in hospital, including those hospitalized for reasons other than the coronavirus, will be affected, and in many cases, unfortunately, fatally so.

Which will come first: Vaccine or collapse?

Since the current global model is containment until a vaccine is found, which is liable to take a year or more, it is essential to understand that what we are facing could be the collapse of the global economic system, accompanied by huge unemployment, which in liable to bring in train the destruction of the social order that we have known since WWII, with social unrest culminating in mob rule.

Under these conditions, action should obviously be without any fiscal constraints, with an almost hermetic floor being provided for all sections of the economy: large and small businesses, employees who are still working, the future unemployed masses, and the local authorities.

Above all, an economic czar should be appointed who really understands the fateful situation and possesses economic management capabilities, with a small cabinet that will be responsible for all activity. The members of this cabinet must on no account be active politicians or academic economists. All of the economic models and past financial theories must be discarded.

In my opinion, the government should provide guarantees for bond issues by most of the needy large companies, including a guarantee for six-monthly interest for a period of at least three years. The government must provide the banking system with absolute security, even more than in the 1983 bank shares crisis, in order to enable it to postpone debt repayments by businesses and mortgage holders. It should be understood that in practice, most of them will be unable to make their payments, so that providing such security is obligatory in order to provide the financial system with both legal and business protection.

We should follow the example of the US, where the government is about to send direct payments in the coming months to most of the wage earners in the economy. This should include National Insurance income supplement for every unemployed person. This will enable everyone to buy the most basic products and maintain a minimally satisfactory standard of living. The government should provide the banking system with a guarantee for the debts of small businesses.

As with an emergency regime in a real war, the Tel Aviv Stock Market should be closed for at least a week. Effective liquidity is negligible in any case, and the scale of the falls and the huge wiping out of value are only increasing public disquiet.

The Bank of Israel should intervene aggressively in the shekel-dollar exchange rate in order to prevent a devaluation at any price. In order to facilitate the Bank of Israel's activity and prevent a draining of Israel's foreign currency reserves, it should be absolutely forbidden to bring forward repayment of overseas credit. Cash in foreign currency for the public should be stopped (Israel's borders are closed in any case, so there is no need for foreign currency). Foreign currency should be allocated only for imports and providing export guarantees, with stepped up supervision of the buyers' identities.

The Bank of Israel should intervene in the bond market with aggressive purchases of government bonds and corporate bonds, in order to stabilize the system and provide some liquidity for financial concerns. The Bank of Israel should stop its empty talk about having to wait for a government.

Cutting the interest rate is almost useless, because those receiving credit in any case have virtually no ability to repay it, and the damage to the banking system that cutting the interest rate will cause is enormous. Direct assistance to the local authorities and all the major public services, such as Israel Electric Corporation, is of course essential.

The collapse of all of the oil producing countries and the irreversible damage that this event is causing the largest of them, whose assets at the peak only a short time ago amounted to $5 trillion (invested mostly in bonds and stocks), guarantees that there will be no real recovery in the financial markets for a long time, because of these countries' need for liquidity.

The crisis: Netanyahu's real punishment

The Bank of Israel should be the direct financier for all of the government's activity, even if this involves many hundreds of billions of shekels. This is the only way to act. I fear that the governor of the Bank of Israel, however brilliant he may be academically, is incapable of adapting himself to the terrible situation before us.

The difference between this crisis and the major global financial crises, such as in 1929, 1987, and 2008, and the 1983 crisis in Israel, is that the current crisis is a real health crisis that is causing a financial crisis, so all that can be done is to mitigate the damage as much as possible.

In any case, even after the current crisis is behind us, the economic model on which the world's economies and the financial system have developed is going to change dramatically. Every model of values, multiples, investment method, or value of investment in land, will change unrecognizably. Entire sectors are about to suffer damage, or have already been damaged, to such an extent that it is difficult to imagine them really recovering. The write-off of values of the various assets - stocks, land, corporate bonds, etc. - is irreversible.

As stated by its Politburo, China has made a conscious decision that economic and social stability are equal in importance to public health. Israel has the advantages of a relatively small economy, and capabilities that may give us the option of avoiding such a terrible choice.

It is almost impossible to refrain from mentioning politics. In view of the above, we are in a real emergency. Anyone familiar with me and my opinions knows that I am not one of the prime minister's greatest admirers, to say the least. In this emergency, however, it is imperative to close ranks, even if the prime minister is a man with three indictments against him.

In general, I think that the prime minister is in the same situation that Moshe Dayan and then-IDF Chief of Staff David Eleazer faced in 1973, when they received the telephone call telling them that they Egyptians had overrun the Suez Canal line. At that time, however, Israel had the atomic bomb and the US at its side. If you like, managing a crisis in which a real victory is impossible is the greatest punishment that the prime minister, as a person, could receive. I have no doubt that Netanyahu would have preferred being tried before Judge Rivka Friedman-Feldman to the impossible battle that he now faces.

The author is a macroeconomic consultant to global funds. He has no business or financial investments in Israel.

Published by Globes, Israel business news - en.globes.co.il - on March 19, 2020

© Copyright of Globes Publisher Itonut (1983) Ltd. 2020

Prime Minster Benjamin Netanyahu at coronavirus aid press conference / Photo: La'am
Prime Minster Benjamin Netanyahu at coronavirus aid press conference / Photo: La'am
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