The Most Wasted Calamity in History

What a shame that the great crash of 2008 isn't being used to learn a lesson or two.

For a moment, maybe even two, we thought the sheer drama of the events, the terror of the crash, the pain of the losses and the frightening numbers would make true change possible.

For a moment, even two, we thought the juxtaposition of the worst financial crisis in history and a president of the likes of Barack Obama would make paradigm shifts possible.

For a moment, even two, we thought the capitalist version of swine flu which spread so quickly in recent years would create a backlash, because the many were deadly sick of the few riding on their backs.

For a moment, even two, we thought the dramatic events would, for the first time, cause people whose greed knew no bounds to pay the price.

So we thought. We were wrong. At least at this time, it's clear that most of these things, which millions of people hoped for, will not come to pass. Not in this round. Not this year.

The anniversary of the crisis, which spiraled to a peak with the collapse of Lehman Brothers, is a great opportunity to take stock, to examine events from a longer perspective, to rise above the daily chatter and understand what really happened here, why it happened, what was done and what wasn't done.

But if we are to learn from the experience of the financial crisis itself, it would be a bad mistake to draw conclusions from the first year after the crisis began. It's too soon to judge the success of how the world has been dealing with it, or to say this is how to end it.

A year ahead of the crisis, it couldn't have been predicted. By the same token, a year after it began, we can't say what's in store down the road.

The maladies of leveraging, consumption and risk-taking took root in the body of the financial system well before they burst forth with full force in the autumn of last year. The same is true of the side-effects and prolonged damage that will be caused by the medicine that was injected into the financial system over the past year.

The true cost of the cure will only become apparent in the future. Will it be a tidal wave of inflation? A tsunami of tax hikes? Sustained erosion of public services? All three at the same time? It's hard to say, since we are only in the first act.

What can we say at this time, without going out on a limb? From this point, the crisis appears to present the greatest lost opportunity in history. To date, no western country has taken advantage of the fact that the financial system almost collapsed to institute sweeping reforms, to change the economic status quo.

The man who perhaps best defined that status quo is Simon Johnson, the former chief economist at the International Monetary Fund. Johnson explained that just as in emerging markets like Russia, Turkey or Thailand, where the economies are controlled and managed in accordance with the interests of a few oligarchs connected to government or of a government connected to the oligarchs, so it is in the United States. Wall Street sets the tone.

Johnson published his comments in the Atlantic magazine in the midst of the financial crisis. Reading his comments, you might come to the conclusion that despite the unprecedented financial crisis which bared Wall Street's flaws, there will be no substantial change in the world financial order. Washington will do what Wall Street tells it to.

Half a year has passed. The markets have begun to recover. And Johnson's prediction, however disappointing, looks amazingly accurate.

Barack Obama replaced George W. Bush at the White House, but he is surrounded by all the same kids from Wall Street. They talk about change and strong regulation and reform, but substantive changes haven't yet been made. They say things that are pleasing to the ears of all those who wanted to see a shake-up, but senior Wall Street officials, who are more cynical and sophisticated types, listen and understand that no substantial change will take place.

The financial system shrank, parting with and writing off trillions of dollars, but it has still not undergone substantial structural change. If there have been major changes, they have actually gone in the opposite direction. They said financial institutions should not be allowed to get too big to fail, but the remaining institutions are bigger than ever in terms of market share. Financial centralization has only grown. The large macroeconomic systems, too, which purportedly underwent major shake-ups, have changed less than what appears on the surface.

One of the primary reasons for the financial crisis is feverish American consumption, financed by the savings of the Chinese. The Americans consumed and borrowed and the Chinese exported and saved. In the past year the Americans were forced to dramatically reduce their consumption and increase savings. The Chinese were forced to rely more on their local market and less on export markets. But the Americans saved their financial system by printing trillions of dollars, which flowed to the banking system and bond offerings. The Chinese continued to buy these bonds. Why? Because they still have no real alternative.

So the Americans have not yet undergone a substantial structural change in their economy.

They exchanged private debt for public debt. The Chinese have not yet created an economy for themselves based on local products and capital markets. If the symbiotic American-Chinese relationship is one of the causes of the crisis, it is far from undergoing a substantial change.

The good news is that Israel didn't participate significantly in the feverish wave of leveraging and consumption that preceded the financial crisis, and the captains of the Israeli economy were not tempted to make major mistakes at the height of the crisis. The previous finance minister, Roni Bar-On, and the incumbent, Yuval Steinitz, withstood pressure from major families who sought to take advantage of the crisis to stick their hands into taxpayers' pockets. The ministers halted all the dangerous plans to eliminate the capital market and to mobilize tens of billions of shekels of taxpayer money for the benefit of a handful of wealthy families.

The less good news is that we had a crisis and we didn't take advantage of it. The financial market regulators preferred to lie low and wait for it to pass. They didn't see it as a golden opportunity to rid the capital market of corruption. In the macroeconomic area, too, this crisis was not exploited and it is doubtful it will be.

The era of major structural reforms is behind us. The government prefers to revel in the relative speed in which we got out of the danger zone, instead of thinking about how to use the events to carry out deep changes in every area requiring attention: productivity, efficiency, flexibility, education and the major social gaps in Israel. We had a crisis. We failed to take advantage of it. And we will have to wait for the next crisis. At least we know it will come.