The Crisis / Paying the Price for Greed

The stock market usually runs on 90 percent economics and 10 percent psychology. Yesterday the proportions were reversed.

Fear rules, the future looks threatening and uncertain, and the biggest fear is the collapse of the U.S. financial system.

Because if a large veteran investment house such as Bear Stearns can go bankrupt after 85 years and with 14,000 employees, who can guarantee that this is the end of the crisis? What about Lehman Brothers? What about the banks themselves?

Fear has struck everyone. Investors said yesterday that they did not want to be left with nothing, and therefore wanted to sell now. In the last hour and a half of trading yesterday in Tel Aviv, mutual and provident fund managers were swamped with a wave of sell orders. They were left with no choice but to sell everything, anything they could get their hands on - even high-quality investments, since at least someone will be willing to buy the best goods, even in a falling market.

And that is how even the most solid companies, Bank Hapoalim and Bank Leumi fell sharply yesterday, along with Africa Israel and The Israel Corporation. And Teva and Israel Chemicals. That is the definition of a crash - everything falls without any distinction between good and bad, including government bonds.

So is it a panic?

When we say panic, we mean an abnormal situation, one where you make mistakes when you are in a state of fear. Anyone who calls it a panic means that markets have fallen far enough, and now is the time to change direction.

But the stock market dropped in the last six months for a number of good reasons.

There are serious problems around the world that affect us too. The U.S. mortgage and hedge fund crisis is not over yet. The recession in America will hurt us here in Israel, since we are big exporters to the U.S.

Real estate prices are dropping, and oil and commodity prices are skyrocketing. Exporters to the U.S. are hurting from the weak dollar, and a credit crisis is now choking economic activity. The Israeli economy is no longer expected to grow by 5% this year, but only by 3.5%. So maybe this is not really a panic, but just an intelligent and accurate appraisal of reality.

Some people never wanted to face up to reality, and they built theories that there were two major economic centers in the world: the U.S. and China. The theory postulated that if the U.S. slows down, China will pick up the slack. But that is not what happened. Everything still depends on America. Those 300 million people still produce a third of the world's economy.

It seems that this is the way the world works: a crash every few years. We suffered one in 1977, another in 1983, then one in 1994 followed by another in 2000 - and now in 2008.

And there was always one real reason for the crashes: Greed.

From 2001 through July 2007, the American economy acted like it was crazy. They bought like crazy, and took on enormous debts - citizens as well as the government.

During those happy years, credit was cheap. Banks handed out expensive mortgages to poor borrowers. The entire American economy was like a giant pyramid scheme.

Huge demand led to two large bubbles: in real estate and stocks. Sooner or later they had to explode. And that is the difficult process we are witnessing now. Inflated prices are falling, risky investments are being wiped out, excess profits are disappearing, and the overly adventurous banks are being replaced.

That is why it is not a panic, but a hard and vicious process where all of us are paying the price. Because when the U.S. economy catches a cold, the entire world falls sick.