Excuse me... but the reform worked - Haaretz

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Last update - 23:03 24/09/2007

Excuse me... but the reform worked

Steve Roach sank into an armchair at the World Economic Forum. Sunk in his misery, the chief economist at Morgan Stanley was oblivious to the reporter facing him across the table and busily tapping at a laptop. The last thing Roach wanted to see right then was a journalist, after the pummeling he'd taken, again, at the opening panel, "Global Forecasts for 2006", by none other than Israel's Jacob Frenkel.

For five years in a row Roach and Frenkel had met at the WEF, Roach representing the bears and Frenkel the bulls. Each year Frenkel taunted Roach for his pessimism, leaving him to stammer about the mistakes of central bankers and that they'd get their comeuppance. Last year Roach even refused to give a quote: Why bother, he moaned, he kept getting it wrong.

Last January Roach didn't even bother to show up. The Davos organizers brought in a new gloomy Gus, namely Nouriel Roubini, who warned of three bears lurking in wait for America's "Goldilocks economy". Frenkel, predicting another boom year in 2007, sniggered and remarked that the bears would turn into bulls.

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During the last two months, Roach was in his element. He hadn't predicted that the crunch would be caused by subprime lending, but the basic scenario that he and others had warned about came all too true. The U.S. property market slid, to the misery of America's acquisitive, leveraged consumers, dragging down the entire economy. (Roach, however is not prancing down Wall Street collecting kudos: Morgan Stanley long since sent the pest to China.)

Everybody knows it's hard to predict the moment a bubble will start to lose air. For five years, property prices around the world had been climbing and risk premiums in the global loan markets had been falling. Sober economists wondered how long Washington could continue to borrow from the Chinese, the Japanese and the Saudis, or how long the American consumer could continue to take out loans, to finance their lavish standard of living.

Some economists spoke of a new economic paradigm: The Chinese manufacture cheap (and save), sell to Americans, get dollars that they use to buy U.S. bonds that Washington sells to finance the trade and federal deficits, and so on. And all the while, the private equity and hedge funds on the Street take their cut and clip coupons. Whee!

Last month the new economic paradigm cracked. The weakest link in the chain is the American consumer in general, and dubious borrowers in particular. Wall Street analysts hastened to call the breakdown a localized event, but the truth was that the leverage, the price inflation and the blithe dismissal of risk had permeated great areas of the marketplace. Too many businesses had based their models on investors ignoring risk.

Bank of England Governor Mervyn King expressed the general sense of surprise when last week he blasted central bankers of the U.S. and Europe for succumbing to panic and injecting tens of billions to bail out banks terrified by the looming liquidity crunch. Rescues by central banks merely reward bad, risky behavior on the part of retail bank. He may have spoken rashly: Last Wednesday he caught the panic bug and poured nearly $10 billion into saving Northern Rock.

The aspirin prescribed by the U.S. and European central bankers, namely interest rate cuts, won't cure the leveragitis pervading the Western economies. After living such a gluttonous lifestyle for so long, they need a long, painful diet, not just a quick fix.

Yet as the cracks spread throughout the global marketplace, Israel's credit market has stood firm, symbolically just as the press reviews the first two years since the Bachar Reform. Local bankers, brokers and so on are so busily arguing over whether the reform is a failure or a success that they've barely noticed the storm beyond our borders that is bringing down great hedge funds and toppling investment banks, while customers stand in the rain outside Northern Rock branches in England, terrified of losing their money.

The fact that the achievements of the Bachar reform are now being taken for granted is the greatest sign of its success:

? Hundreds of billions of the public's shekels have passed to non-financial companies, without any crisis.

? In the past two years the capital market has become much deeper, broader and more liquid.

? Companies have borrowed more from non-financial sources in the last two years than throughout the entire 1990s.

Five years ago Israel's banking system stood on the brink of bankruptcy. Today it is at its most robust, due partly to the dramatic development of the non-banking financing sector since the Bachar reform began. In other words, much risk passed from the banks to the capital market.

Israel's banks are not immune to a protracted global credit crisis, but with a broad non-bank sector lending to companies, it is better prepared to weather the storm.

Last week Finance Minister Roni Bar-On declared another capital market reform commission. The first Bachar reform was associated with Benjamin Netanyahu. Now Bar-On and Prime Minister Ehud Olmert want their own reform panel, to "fix the mistakes of the first one" and present Bar-On as a great reformer too.

But their spin won't work. We don't need another Bachar Commission: Everyone agrees on the next, necessary steps, most of which were laid down by the first commission:

? Create an alternative, Web-based distribution system for financial instruments so that the new financial giants can access customers directly and compete with banks over deposits and loans.

? Amend the law to permit big players to compete with the HapoaLeumi duopoly in lending to households and small businesses.

? Through regulation, encourage the establishment of virtual banks that could cut into the banks' fat profits.

? Let mutual funds create money-market funds to compete with the banks, which pay insanely low interest to customers.

? Pursue antitrust measures to create competition in the credit-card sector. Make sure the insurers compete instead of eating the credit-card companies alive.

? Pass a law immediately to allow consumers to switch insurance and pension plans.

? Set up a central supervisory body incorporating the Securities Authority, the treasury's capital market department and the Bank of Israel's supervisor of banks.

The composition of the second Bachar reform panel is crucial. The first succeeded because it was filled with genuine revolutionaries, not spinmeisters and buddies of bankers. Moreover, the panel must be chaired by a strong, decisive figure unbeholden to the banks.

The person's first task will be to tighten supervision of the bodies managing other people's money. Bar-On, Bank of Israel Governor Stanley Fischer and whoever chairs Bachar II shouldn't wait for an Israeli meltdown.

They must start acting now to create a powerful deterrent, lest come next Yom Kippur they beg on bended knee for the forgiveness of hundreds of thousands of Israeli savers that the Bank of Israel, the Securities Authority and the treasury neglected to protect.

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	Jewels of the East
	For years Kfar Saba, Ra'anana and Hod Hasharon have been competing for the lead.


	Dodging the crunch
	The Bachar Commission did a fine job of protecting us from the global credit crunch.




1.	The Reform Worked - An Excellent Analysis	09:45	\|	Papamaneiros	25/09/07

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