Taking Stock / Obama Can, but Israel's Prime Minister Can't

The American economy and financial system will dramatically affect local fortunes.

Greetings to Israel's next prime minister, the person who has to lead Israel through the economic crisis, which is gaining momentum as you read.

We still don't know who you are, even though the election is over. But it doesn't matter. The economic challenges you face don't depend on your identity, and in any case the economic platforms of the contenders were vague and, at some levels, indistinguishable.

The American economy and financial system will dramatically affect local fortunes. The policy that U.S. President Barack Obama institutes over the weeks and months to come will shape the economic dialogue in Israel and the rest of the world.

Israel's prime ministerial candidates would have liked to be Obama: He charmed America and the rest of the world, promising change as the worst financial crisis since 1929 lashes at the globe.

But now the elections are over, and Obama isn't the appropriate role model. Israel's and America's economies are different. Anyway, even Obama will have to be less Obama over time.

He begins 2009 with a budget deficit of 10% to 12% of gross domestic product. If the most popular leader in the world is heading that way, Israel's leaders must be awfully tempted to follow him. Why not allow Israel's deficit to burgeon to 7% or even 8% of GDP?

Prime minister, don't even let that thought cross your mind.

First of all, Obama has no choice. America's economy is imploding. Washington has run out of monetary ammunition: Interest rates have nowhere to drop. The financial system has been on life support for four months, and at this point, Obama has to use whatever medicine he can - whether conventional or alternative.

Second of all, the United States can still print money and increase its deficit by trillions of dollars without suffocating the economy or raising interest rates sky-high. The U.S. dollar and treasury bonds are still everybody's favorite financial assets.

The shekel isn't. A deficit of 7% of Israeli GDP would trigger a surge in interest rates, strangle the local credit market and trigger investor flight.

Make no mistake, new prime minister. Happily for us, Israel's economy hasn't caught the three American diseases - consumer and private credit greater than 50% of GDP, a bursting real estate bubble, and a bankrupt financial system because of the first two diseases (and other causes).

Americans spent the last decade living well beyond their means. Israelis saved.

Prime minister, in Israel, the government's intervention in the economy should focus on breaking the monopolies, destroying the pork barrels in the public sector, and helping small and mid-sized businesses, which create jobs.

It shouldn't be engaging in how to help the big holding companies and real estate concerns recycle their debt, creating jobs for nobody but brokers and lawyers.