An Island of Relative Stability

We will also suffer from the economic crisis in Israel. Our exports will suffer, companies will close, the job market will weaken, the state's tax revenues will fall, and our pension savings will take a tough hit. And all that in an election year.

Last week was one of the most dramatic weeks in world economic history. What started as a local issue of problematic American borrowers paying back mortgages blew up in the heart of the capital of world finance. Banks and huge investment firms founded 150 years ago closed their doors, were sold or nationalized at a breathtaking pace - and trillions of dollars disappeared along with hundreds of thousands of jobs.

The crisis that struck Wall Street will drag Main Street down with it. Many more companies will go bust, millions more will be fired - and the entire world will suffer a serious recession.

We will also suffer here in Israel. Our exports will suffer, companies will close, the job market will weaken, the state's tax revenues will fall, and our pension savings will take a tough hit. And all that in an election year. This will create an uncomfortable mixture of an inability to govern, a breaking of the budgetary framework, rising inflation and an interest-rate trap. And still, it seems for now that the damage here will be less severe than on Wall Street.

The statement "the State of Israel is an island of stability" was etched in our memories in 1997 by Benjamin Netanyahu, when as prime minister he tried to deal with the world currency crisis. The shekel fell 10% in a few weeks and Netanyahu, who was trying to prevent a freefall of the currency and a collapse of the Israeli financial system, attempted to calm the markets. In a series of interviews conducted in one day, Netanyahu repeated his impressive - but quite problematic - sound bite.

And he suffered for it, because everyone attacked him. His critics claimed he was out of touch and did not understand economics, and some observers even enshrined his statements in the Hall of Fame of ridiculous sayings.

But to a certain extent, Netanyahu was right. The American financial system is drowning in the Hudson River, and Israel, despite all its connections to New York, is remaining dry for the most part, at least for now - though the uncertainty is great and it's not clear where the next blows will come from.

Banks, insurance companies and investment houses here are in no danger of collapse due to extremely high leverage or excessive risk. The mortgage market - the trigger for the horrible crisis in America - is much healthier here and our rate of nonpayment is very low. Even real estate prices in Israel never reached bubble levels, so they can't fall as sharply and pull the entire economy down with them.

But does anyone deserve a medal for this? Not really. Certainly not the banks or regulators. What saved us this time from a descent into the dark hole dug by the advanced, sophisticated American financial system and its sheer greed were characteristics that usually are nothing to be proud of - or worth trusting - when managing an economy: luck, laziness, inefficiency and a lack of sophistication.

The inefficiency was on the part of the regulators, who have still never succeeded in creating an environment appropriate for securitization. The banks are responsible for the lack of sophistication, and they have never reached the level of U.S. banks. Bank Hapoalim was in a sense on its way there, and that's why it showed the biggest losses.

When the treasury's capital markets commissioner, Yadin Antebi, took up his post three years ago, he urged the institutions managing our pensions to invest overseas, claiming that a lack of exposure to global investments threatened our savings. It turns out, just as in the joke about a clock that has stopped but nevertheless shows the right time twice a day, we were lucky we were stuck in the past.

After all, if the banks only could have, they would have shoved the strange products from Lehman Brothers down the throats of the entire business world here, because their power is almost uncontrollable. Now, in addition to the economic problems expected to face us in the next year or two, we will have to learn from the tough experience across the ocean - and go forward.