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When stocks fall, we all hurt. There is no escaping it. Even if you're a "small investor" who doesn't trade in the market directly, you almost certainly own units in a mutual or provident fund; you probably have pension savings in "manager's insurance" or some other scheme. The problem is that each of these bodies has placed about 30 percent of its assets into stocks - so everyone loses from the collapse.

But the losses will be even more painful when the economy as a whole begins to falter. The huge storm buffeting the United States inevitably affects the whole world, which includes us, of course.

Bank of Israel Governor Stanley Fischer said in an interview with Bloomberg this week: "I haven't seen anything on this scale in the global economy, at least since I've been active ... the repercussions of the U.S. recession on the world economy are much more grave than I've seen in the past."

Israel's market is wide open. Imports and exports are responsible for about 90 percent of Israel's gross domestic product. That is a lot. Not only does most high-tech export target the United States, this is also a main growth driver for Israel's economy. When the U.S. economy slumps, Americans buy less, and Israeli exports hurt. The weak dollar is also hurting Israeli exports.

When American financial institutions and banks write off huge amounts, they also reduce how much they are willing to lend. They start to inspect every borrower and project from A to Z. This creates a liquidity problem, which is bad news for Israeli companies used to borrowing money overseas. Israeli startups may have grown accustomed to knights on white horses sweeping out of the financial heavens to buy them for exorbitant sums, but they will now find such saviors becoming extremely rare.

One afternoon this week, a customer bought a shirt at a shop in South Tel Aviv. "You're the first customer I've had today," the shop owner told him. "I'm the best barometer for the economy's state. As soon as the stock market plunges, people don't come in. They stop buying."

The shop owner was describing the "wealth effect": When we feel well off, we tend to spend more. But as soon as the stock market wipes out part of the public's wealth, we stop buying and step up saving - both to make up for what was lost and to prepare for harder times. Thus the economy begins to slow down.

These are circumstances that demand help from the Bank of Israel. The governor must help spur growth - on condition that he keeps prices stable. But the finance minister has an even more central role to play. He is the one who is actually in charge of economic growth. He must make sure that the appropriate infrastructure is there. He needs to revise the budget and start carrying out reforms.

As far as the state's revenue is concerned, we are in for a fall. We must not forget that a considerable part of tax income in recent years came from the stock exchange. But now the wheel has turned and instead of calculating tax revenue, the Tax Authority will be called on to recognize the losses.

Roni Bar-On has a problem on the expenses side as well. He has been stalling a long overdue budget cut of NIS 1.5 billion, due to budget excesses. He also faces populistic demands to increase the budget "to stimulate economic activity."

Surrendering to these pressures would be a big macro-economic mistake. If the government were to dare increase spending now, the public would immediately reduce private consumption and investments. People understand that if expenditure rises and the deficit grows, the government must impose more taxes and raise more money, so they prepare for bad times by saving more. Also, a higher budget deficit increases the national debt, which will lead rating agencies to downgrade Israel's credit rating, which will lift interest rates later on.

No matter how you look at it, higher government spending will worsen the slump and deepen the crisis. This has happened before.

Now is the time for cutbacks and and reforms. If a plan is presented to the public, it will understand that the moment the government reduces its expenses, it would also be able to reduce taxes. The public will then not fear stepping up consumption and investments. Thus the slowdown will be more moderate and the economy won't stop in its tracks. Does Bar-On have the political power to carry out such a plan? Will Olmert support him?