Taking Stock / It's a Dog's Life

If you remember the last time America's rates sank this low, then we know something about you - you're no spring chicken. On Wednesday the chairman of the Federal Reserve Board, Alan Greenspan, cut the funds rate by 0.5 percentage points, to a mere 1 percent. The last time the U.S. rates were that low was the late 1950s.

Nor was that the only record broken by interest rates on Wednesday. Japan's interbank rate sank below zero for the first time in history, meaning the banks are paying interest to their borrowers. Interest in the States and elsewhere has been receding fast for over two years. But only in the last few months have investors around the globe started to digest the significance of that fact, not to mention grasping that the trend may not change any time soon.

As long as the rates were dropping fast and expected to keep doing so, investors in bonds could post capital gains as bond prices rose. But with interest rates almost touching the floor, everybody understands that not only are current rates practically zero. So is the chance for future capital gains as interest rates drop even more. The result is palpable among investors everywhere: a hunger for yields, a craving for financing round higher rates, a yearning for financial instruments that generate more than the trifling interest rates of Greenspan and his crony central bankers.

Hundreds of thousands of millionaires around the world found themselves in a new situation this year. They were accustomed to getting rates anywhere from 4 percent to 10 percent, and now find themselves getting a pitiful 0.5 percent on their bank deposits.

Borrowers go to town

A multimillionaire with $100 million to his name found himself garnering a wretched half-million dollars in annual interest. Now, anybody who's achieved wealth of that magnitude knows you can't maintain your standard of living on interest of half a million. Millionaires in the wealthier nations also know that their loss is the gain of the lower echelons of society, the ones that finance their homes and consumption through loans from the banks. These people are really going to town. They are buying cars on installment plans, and homes at bargain-basement interest rates.

The low rates in the financial markets are creating a historic shift of wealth from the savers, which are usually the rich, to the borrowers, who are usually the poor.

The upshot is that millionaires are starting to run amok around the globe, scrabbling for riskier investments that would yield the kind of returns to which they'd become accustomed.

Their hunger is palpable in the Israeli marketplace too. A new phenomenon has spread in the last half year as foreign investors come to the Tel Aviv Stock Exchange to buy Israeli government bonds, because they are offering 7 percent more interest than comparable American T-bills. The $600 million in foreign money invested in Israeli government paper and Bank of Israel short-term certificates triggered a wave of demand for bonds, and a supply of foreign currency.

Locals jumped up to ride the wave too, joining the surge that lifted the stock market and mood on the financial markets. The goods news is the entry of the foreign investors into Israeli government bonds demonstrates the drop in risk associated with the Israeli economy.

The bad news is that the tremendous interest rate differential between Israel and the rest of the world represents a terrific missed opportunity by our economic leaders. The slump in global interest rates could have been a terrific opportunity to lower Israeli rates to an all-time low too. That would have stimulated our battered, tattered economy, reduced the government's cost of capital, and eased the credit crunch crushing the marketplace.

An opportunity to miss an opportunity

But the Bank of Israel's ability to lower lending rates that aggressively is doubtful, given the huge magnitude of the anticipated government deficit, and the public's fresh and painful memories of the last time the central bank dared to slash the rates. The combination of fiscal fiasco and monetary debacle has led Israel to miss the opportunity to reduce local interest rates.

Instead of reaping the fruits of the painful contractionary monetary policy imposed here for the last decade, we are forced to swallow more and more of the bitter monetary medicine. While around the world, wealth is shifting from lenders to borrowers, in Israel it's the opposite. Here, the millionaires with the liquid assets are celebrating as their money flows into bonds, savings accounts and deposits bearing the sky-high rates charged to their debitory customers, the people with mortgages and overdrafts, mostly from the lower echelons of society.

The only comfort we can offer to the people being gouged is that in Israel, lots of the people thought to be millionaires are actually the biggest borrowers of them all. And today, unlike in the past, the banks are starting to charge them interest rates that reflect the true risk associated with their businesses. But that is cold comfort, we know. History shows that when Israel's big borrowers collapse, the system simply rolls over its losses onto other people.