The Bottom Line / They Took the Bait

"In light of the expected large deficit in 2009 and 2010, the government will avoid as much as possible spending budgetary funds to overcome the credit crunch, and give preference to credit guarantees," wrote Benjamin Netanyahu's 100-day transition team in recommendations presented to him Thursday.

In the same spirit, the team proposes increasing the maximum amount the state can provide in guarantees by 2.5 times - an additional NIS 30 billion.

Guarantees, as everyone knows, is a fancy word for insurance. Insurance, as everyone knows, is a very tempting product to sell at a very low price, all the while ignoring that at some time in the future there will be a need to pay off.

Tempted by a fallacy

If you want to learn how well the system of "Sell the insurance today, forget about the commitments in the future" works, and how dangerous it is, take a look at the state of what was until recently the largest insurance company in the world, AIG.

But Netanyahu's 100-day team, headed by MK Yuval Steinitz, swallowed the bait. The transition team, which is supposed to advise Netanyahu on economic policy, was tempted by the fallacy that state guarantees do not cost anything and do not burden the budget - and therefore, can be handed out without limit.

The fact that today's guarantees could destroy the Israeli economy down the road if the bond markets continue to deteriorate doesn't seem to bother the members of Netanyahu's transition team at all.

The team's recommendations are infected with shortsightedness, even irresponsibility. State subsidies for the bond markets - either via direct state guarantees or put options on the bond indexes - expose the state to huge insurance risks.

Who will pay? The taxpayer, of course

And who will pay for this risk? There is only one address: the taxpayers of the State of Israel.

And who will benefit from the insurance? Again there is only answer: The owners of corporations who will enjoy the opportunity to roll over their debts at preferential terms.

And who will pay for neutralizing the risks? The institutional investors, the representatives of the public, via the fees they will pay the state.

This is without doubt an incredibly absurd situation: Taxpayers bear the risk, retirement savers pay the guarantees, and the rich corporate owners enjoy all of it without having to pay a cent.

Is this the efficient economic solution Netanyahu is talking about?