Ten wise men cannot retrieve a stone thrown into a well by a fool. And the same is true in economics: One bad law will engender a bad agreement, complications and disputes - and the stone will merely sink deeper into the well.

The bad law was enacted in June 2004, part of a legislative blitz by the Knesset. It stated that government grants to the local authorities via the banks would be protected against seizure by the authorities' creditors. This was a severe infringement on property rights and on contractual freedom. And the banks feared that it would not be the end - that next time, the Knesset might pass legislation erasing half the debt. Therefore, they reacted harshly (and rightly so) and stopped giving loans to the local authorities.

Behind this unconstitutional law stood Finance Minister Benjamin Netanyahu and Prime Minister Ariel Sharon, who were not wise enough to withstand the pressure applied by the mayors, who had stopped paying salaries to some 20,000 workers. But this is precisely the type of situation where leadership is needed.

The banks' refusal to grant new loans predictably made the crisis even worse and sent the local authorities into danger of collapse. That is when the next "creative solution" sprang up: to persuade Bank Otzar Hashilton Hamekomi to replace the rebellious commercial banks (Hapoalim and Leumi) by significantly increasing its loans to the local authorities.

The director general of the Prime Minister's Office, Ilan Cohen, liked the idea. "Without the emerging deal, the local authorities will collapse," he said.

The only problem was that Dexia, the company that owns Bank Otzar Hashilton Hamekomi, understood that the government was under tremendous pressure, and therefore requested a few minor changes, like improving its existing agreement with the government and reducing its royalty payments.

The bank essentially wanted to act as a middleman between the government and the local authorities - a middleman that would reap profits at the expense of both the authorities and the public, while incurring no risk whatsoever. Can you imagine a better deal? But Cohen wanted an agreement, despite its flaws - even though this sends us backward 25 years, to the days when the government was deeply involved in the capital markets.

A different solution is needed, one that addresses the root of the problem: the irresponsible management of the local authorities. It is simply unacceptable for the authorities to overrun their budgets year after year, to take out billions of shekels in loans, and then to hold a gun to the taxpayer's temple and tell him: "Hand it over!"

The solution should also address the banks, which kept giving financially shaky authorities more and more credit, on the assumption that the government would always give in and give the authorities more and more grant money.

The law enables the government to impose a creditors' arrangement on every authority in financial difficulties.

This means replacing the mayor with an appointed liquidator, who would then reach an agreement with the creditors under which all of them, including the banks, would have to waive repayment of some of their debts. From that day forward, the town would have to change its ways and start to live within its means. That is what was done with Taibeh, which did in fact change its ways for the better.

Afterward, the government must stop "babysitting" the local authorities. It should give each town what it deserves according to the law, but stop managing them. When mayors understand that they, alone, are in charge, and they can expect nothing from Jerusalem, their behavior will change. The waste will stop, and municipal tax collection will increase - because the mayors will know that they will have to answer to their voters, the residents of the local authorities.