Soft Landing / Israel Teaches the World a Lesson in Economics

A year after the financial crisis turned into a full-blown meltdown that may not be over yet, we can pat ourselves on the back.

One has to admit it: Pride is in order. Exactly a year after the financial crisis turned into a full-blown meltdown that may not be over yet, we can pat ourselves on the back. As things look now, little Israel weathered the worst storm in 80 years better than most of the developed world. To a great extent, we have taught he Americans, the British and the Japanese a lesson in economics.

How did we do it? First of all, by virtue of past failures. Israel is a light unto the nations when it comes to economic chaos and foolishness: It stumbled from one crisis to another for 40 years. The worst was in the 1980s, when we reduced our banks to bankruptcy, resulting in their nationalization (the "bank shares crisis"). Two years later, the entire economy was wracked by hyperinflation and trembled on the brink of default (remember the "great stabilization plan"?)

That pair of fiascos could have crowned Israel with a dunce cap. Instead, what happened is that in contrast to the present global meltdown, from which nobody seems to have learned a thing, Israel did learn the requisite lessons from its resounding mistakes. Unbelievable as it may sound, we did it right: We leveraged our past disasters and created mechanisms to make sure they wouldn't happen again.

It is precisely because of those resounding past mistakes that Israel's banks did not copy those of the West and lavish loans on hordes of dubious borrowers, or invest pots of money in even more dubious assets backed by yet shadier mortgage loans. The culture of Israel's banks in the 25 years since the trauma of their nationalization (only Bank Leumi is still owned by the state today) has been a relatively careful, cautious one.

As an aside, one must wonder whether the relative conservatism of Israel's banks, and the fact that they did not push into high-risk loans and assets, is not the result of the absence of competition between the local banks. With no competition and the banks simply divvying up the market among themselves, there is less pressure on management to dare all.

But either way, our resounding mistakes did not change only the culture of bank management in Israel. It also changed the regulators, mainly the supervisor of banks and the commissioner of capital market, insurance and savings. One has to applaud Supervisor of Banks Rony Hizkiyahu, who personally forced the local banks to increase their capital - before the crisis erupted. In retrospect, that cushion of extra capital helped stabilize the local banking sector.

By the same token, one must also applaud the regulator most spattered with mud in this crisis - Yadin Antebi, commissioner of capital market, insurance and savings at the Finance Ministry. He was central to a reform that reduced risk in the credit and capital markets. The fact that credit in Israel is now available from a great many sources, not just the banks, and that Israel's investment market is also widely dispersed among a great many bodies, spread the risk when the crisis descended. The fact is that not one single Israeli lender or investment body had its very survival endangered by undertaken risk.

Moreover, as the crisis unfolded, Antebi issued a number of extremely important regulatory directives to prevent future trouble before it arises. For example, he changed the structure of remuneration for the people who manage pension monies, to make sure that greed does not induce them to risk our savings for old age.

Several European insurance companies collapsed after making bad investments. Over here, Antebi instructed insurers to change their rules for investing their own equity. He is also pressing the insurance companies and institutional investors to step up their internal auditing and risk management; that change is still in process.

Antebi also set up the Hodak Commission, which is looking at the worst trouble Israel had during the crisis: problems in the bond market, which deterred pension managers from investing there.

Yet all this pales compared with the truly radiant success that followed our resounding mistakes: a sea change in macroeconomic management, from 1985 to date. Israel entered the recession with a balanced budget, a contracting national debt and a stainless record of the government paying its debts. And thus we weathered the crisis relatively intact.

One may detest the "young turks" at the treasury. One may cringe at the institutional corruption in the Bank of Israel's salary practices. But over the last 25 years, the Finance Ministry and the Bank of Israel together brought Israel to balance its budget and behave conservatively and responsibly. Yes, among the OECD nations, Israel behaved like the only responsible adult.

And it turns out that there is a reward for its budgetary responsibility: Little Israel is still standing in the aftermath of the storm, without having had to mortgage the future of its children via gargantuan investments to rescue collapsing systems.

Yes, there is a reward for responsibility. That is the most important lesson of the financial crisis. Now, Israel just has to remember it.