Text size

This year isn't going to resemble any era we've known, certainly not as far as the capital market is concerned. Wall Street and the City in London dictate how markets will behave the world wide, and they're contracting. They're changing the rules and culture, changes that will come to Tel Aviv as well.

Nobody knows how the rest of the year will look. But here are six likely consequences of the worst financial crisis we've seen in 70 years.

But after the collapse of Lehman Brothers and a host of other banks overseas, and the discovery of the stunning $50 billion fraud by Bernie Madoff, the real fear isn't of low returns, it's of losing everything you have. Israel's chastened, frightened people are crawling back to the only transparent, fraud-safe vehicle they know - mutual funds.

Deposits in mutual funds increased in January and February, and the trend is likely to gain momentum in the months to come. But the entry of fresh money won't solve the fundamental problem of mutual funds - their fees are so high they can't beat the market.

It's true, too. The only reason investment managers did so well in the last two decades was that the trend was almost ceaselessly upward. When the market is jolting violently about, let alone in retreat, go pick a winning stock, and investment managers don't want to let down their clients. One solution is to bow out of the game entirely, admit they can't pick winning stocks, and simply invest by index - choose a base index and buy all the stocks in it. Over here, Phoenix has already announced it's doing that very thing.

Stock markets aren't about to disappear, but they'll retain relevance only to few. The financial fate of the masses will depend on another arena entirely - the bond market. It's no coincidence that James Carville, former economic adviser to Bill Clinton, said, "I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter, but now I want to come back as the bond market. You can intimidate everybody."

But a government bond is a loan by you to the government. Where will governments find the money to repay everybody, given the sky-high amounts they're borrowing to rescue the financial system and jump-start the economies? Answer: They'll issue new bonds. Result: A glut of bonds and inflation, which will depress bond prices. Economists expect that in two years, the price of government bonds will reflect returns of 7%, which will also depress the price of Israeli government bonds.

Ha. Human nature is stronger than regulation. Too many people who can't afford it will do anything they can to preserve their lifestyle and will fall to the temptation of illegal means. Public corruption will increase too because government officials have become even more central to the economy (here, of course, they always were).