Make a new plan, Stan, and get yourself free

Spanish banks are laying off workers, and getting EU bailouts. The Anglo Irish Bank is being liquidated. Some British banks have been part-nationalized to stave off collapse, and Italy and Greece are struggling to keep their economies afloat.

But Israel – beleaguered, embattled and with few natural resources – has managed to keep its economy not only buoyant but racing away at an enviable speed during these troubled times.

How on earth did we manage it?

Well, there are many that point the praise at the governor of our central bank, the inimitable Professor Stanley Fischer. Yes, Stan The Man, captain of the good ship Bankofisrael, author of the acclaimed Essays on Contingent Assets and Felafel, Go Easy on the Schug, and founder of the Eazy Muney, no-commission, currency exchange kiosk on the corner of Ben Yehuda and David Klein streets, has been widely lauded as the one individual who kept his head when all about him were losing theirs, and steered the Israeli economy through the storm. Not only that, but his policies may very well have beneficial effects on our economy for years to come.

Some of you may have heard of the subprime crisis: the crisis that erupted after mortgages were sold at stunningly low prices to the poor and huddled masses of America. These loans were then bundled together into unrecognizable pretty packages with colourful ribbons and funky acronyms, and sold on and on again to everyone in the financial markets. Trouble came when interest rates rose, and the pitiful householders failed to meet payments and defaulted on their mortgages. The collapse of this market knocked out many major players - banks and investment houses - throughout the financial world. Except for Israel’s wonderful banks, which remained robust. Is this because our banks are all-seeing, all-knowing, all-wonderful? Allevai. No, rather because they’re so slow and hadn’t actually got round to unwrapping the pretty packages (and anyway all the acronyms were in English) so by the time our illustrious banks considered buying the subprime loans, it was too late. (Thank goodness).

Anyway, Stan The Man has, among his many policies, introduced such restrictions on the mortgage market in Israel that would make it impossible for any subprime loan sector to even raise its ugly head here. You need a far larger deposit on a home in Israel before you can approach a bank to give you a mortgage, for example. As if buying a home in Israel wasn’t hard enough for newcomers to the property ladder. Housing in Israel is disproportionately expensive (in terms of how many months’ salary one has to earn to buy an average property) not because of mortgage restrictions, but because the state, through the Israel Lands Administration, still owns most land in Israel and is very reluctant to let any of it go.

By the way, if you follow my blog, I wrote a while ago about the popular politician and former cabinet minister, Moshe Kahlon, and suggested that this is a man to watch. And lo and behold, no sooner had Prime Minister Benjamin Netanyahu finished reading my blog and chosen what his wife should wear for that day, than he went and announced that he was appointing Kahlon head of the Israel Lands Administration in order to shake up the whole system. However, the appointment is still pending: As is usual in Israel, Kahlon first has to fill out the forms in triplicate and then bring his end-of-year First Grade certificate, signed by both his parents, and stamped by an authorized notary that knew his First Grade teacher personally for no less than 12 years. So, it’s not yet a done deal.

Well one of us will have to go. Photo credit: Amos Ben Gershom / GPO

Stan, in the meantime, announced he’s had enough, that after seven years at the Bank of Israel he’s now saved up enough to buy his own parking space in central Tel Aviv, and has decided to retire. Rumours are rife as to his next move. Some say he’s applied to be the next pope, a position that was opened up recently, and indeed there are reports that white smoke signals have been wafting from his office on the 7^th floor. Some say he’ll be off to the sun-soaked state of Florida to write his memoirs “Brother, Can You Spare a Shekel?” to be ghost written by five dead former prime ministers of Israel. Others believe that now that Dame Edna Everage has retired, Stan will be launching his own chat show on cable TV.

Back at the ranch, names are being mooted to replace him. In his professional manner, he did say that his deputy Karnit Flug was certainly capable: “I would not have proposed appointing a Deputy Governor whom I did not believe would be able to function as Governor when necessary.” Flug in the past headed the Bank’s Research Department, and was a member of the government-appointed committee that looked into waste and inefficiency in the army. You are welcome to read the findings of that committee, but – BEWARE! SPOILER AHEAD – basically, they concluded that “the army is full of waste. So let’s help them become more efficient, and give them an extra NIS10 billion a year”. A conclusion worthy of Chelm, without a doubt.

Let’s hope that a suitable candidate pops up before Stan jogs off into the sunset in June. For all our sakes.

Should do better. See me after class

This summer was one of social protest, and our politicians, now refreshed and returned to the trough for the winter session of parliament, are keen to appear as if they are all part of this social revolution.
Meir Sheetrit, a member of Knesset who has never worked in the private sector in his life, came up with a brilliant idea. He proposed a law that would exempt young couples, and singles, from paying VAT on their first homes. (If it sounds a little odd to say "young couples and singles", well that's the odd wording of his proposal. I can just imagine he first wrote "young couples" until someone pointed out how that was discriminatory, so he added in "and singles"). Well that’s fabulous, and who knows how many thousands of votes that will... I mean how many thousands of young couples that will help get on the first rung of the property ladder. Respect Meir! Way to go!

Now you’ve been nodding and thinking “Well that is good news. It would really help.” If that’s the case, then I would suggest that you too consider becoming a politician, because our MKs - particularly life-long careerists like Sheetrit - are full of such knee-jerk reactions, but are too hurried/exhausted/stupid to actually investigate their own suggestions. All knees and no brains. [Not that I'm implying that you are..., heaven forbid.]

This bill, if you look at it, will result in the exact opposite of what it purportedly set out to achieve, in this case help potential homebuyers in a very expensive market.

A market consists of buyers and sellers (that is demand and supply). Currently our housing market is overheated; many thousands of people in the market are fighting over too few properties, or at least not enough in the areas of highest demand. Hence the high prices. And Sheetrit’s solution is to shave the cost for young homebuyers. Will this allow some couples, who currently are struggling to get enough funds together to buy a flat, put in a bid for a home? Yes, of course it would. That’s what the bill is there for. The result? Well, whereas before you may have had three couples bidding for a flat in downtown Petah Tikva, now you’ll have five couples (the extra two are those facing no VAT, thanks to Meir). Prices were high when three fought over the property. What will happen when five are in the game? Prices will go up. I predict (and this is all on my ownsome, with no monstrous BankofIsrael econometric model pumping out statistics for me) I predict, as I say, that if this bill gets passed, then house prices will go up, ceteris paribus. (STOP THERE! Latin alert! Yes, now some of you, who may not have had the benefits of a fine English education, may be flummoxed somewhat by Latin expressions. Don’t be. They are not there to perturb, per se. They serve a purpose. They can explain succinctly what it was you wanted to say. And in this case, I meant “all other things being equal”. In other words (id est) if nothing else changes that also affects housing, then this will result in higher house prices.)

And it doesn’t surprise me.

Knesset, that venerable, risible institution, is full of charlatans, and I mean that in a nice way. I mean they are amateurs. They discover a problem on Monday, suggest a solution on Tuesday, and pass a new law on it by Thursday. The following week, they discover that instead of helping, the new law has actually made things worse.

Here’s another example of a half-baked law by half-baked politicians. Back in 2000, the Knesset adopted an amendment to the Law on Employing Workers through Manpower Agencies. The change in the law stated that "A worker via a manpower agency shall not be employed by an employer for a period of more than nine months." The aim, supposedly, was to change the status of thousands of agency workers, very often employed for months if not years, sitting next to inhouse workers, possibly doing the same work, but for less pay, and on shakier grounds in terms of conditions, pensions or perks.
Only the result was clear for all to see. Employers were likely to dismiss workers just as the nine-month deadline approached. The implementation of the law was postponed FOUR times, and finally came into force in 2008. It has caused disruption, instability, and heartache for the very people it was intended to help. One case involving a manpower agency used by the Israel Antiquities Authority has reached the courts after 21 workers were dismissed, and then immediately replaced by other agency workers.

Maybe our politicians should do a little more homework. Parliamentary bills in England are routinely sent to everybody that might be affected—individuals, companies, unions, trade organizations, professional bodies—for their feedback and input, and this preparatory stage takes at least a year. The result? Laws that work, are respected, and stick around for ages.

Sheetrit's bill by the way was chucked out of Knesset this week by 44 votes to 32. There is hope yet. 

An affordable home? Certainly, madam. Would you like that wrapped?

This summer has been one long series of rallies. The protests, loosely led by the taxpaying, hard-slogging, reserve-duty-serving, middle-income earners of Israel, are predominantly about the lack of affordable housing in Israel, particularly in the most popular parts of the country.
Property prices have indeed skyrocketed in recent years, while incomes have barely moved. And some of the banner-waving crowds argue that this clearly shows that capitalism has failed, and blame the free market. Down with the tycoons, they shout, accusing the prime minister of giving in to the developers, helping them get richer while Mr and Mrs Average fall far behind in the ratrace. A typical apartment in Israel today costs the equivalent of 114 times the average monthly salary. Compare that to the average home in France costing 90 times the average wage there, or 71 in Britain, or just 54 in Germany.
Israelis, on average, have reason to despair.
But I don't think the free market is to blame. On the contrary, the situation we are in today is because THERE IS NO FREE MARKET in housing in Israel.

First let's all agree on what a free market is. If you imagine a typical old market scene, such as in this delightful picture from Cambridge England, then you're already on the right track. It's where lots of buyers and sellers meet. Economics (the study of how we use and distribute scarce resources) goes a little further to describe what it calls a perfect market. It makes some assumptions such as: everyone acts rationally, which, for arguments sake, let's say, is true even in Israel; there is perfect information, i.e. everyone's aware of what's happening in the market; no one buyer or seller dominates the market (and hence the price), and there are no barriers to anyone becoming a seller; and the good or service is homogenous i.e. each product is identical.
Sounds idealistic? Unreasonable? Exists only in textbooks or in the minds of professors and philosophers? Not so. The market in Teva shares, let's say, is a fine example. It's a homogenous product; there are millions of buyers and sellers; no one stops you selling; and it's pretty easy to keep track of prices.
So what? I hear one or two of you asking. So we have a free market. What good does that do anyone? Where's the social justice in that? Hold on, hold on, my little pumpkins, we're not there yet.
The result of such a perfect market is the "right price". And what do I mean by the right price? I mean the price that clears the market.
If the price is "too high", two things happen: more sellers step in to cash in on the top price, and two, buyers get put off as it's too costly. True? In other words, supply rises and demand falls. These two work together to push the price down.
Conversely, if the price is "too low", some suppliers will get discouraged, pack up and go home, waiting for a better occasion to make their profits, while more buyers will rush to the market to snap up a bargain. Result? Supply falls and demand rises. Both of these move to push up the price.
So buyers and sellers interact in the free market until they reach the "right price" (or what economists call, the equilibrium price), where supply meets demand. Ten people are shopping for the goods, and ten goods are on sale at the price they're prepared to pay. Voila, everyone's happy. The market clears.
Now let's look at housing in Israel. It's a far far cry from the free market. Prices today are "too high", which according to our theory should encourage suppliers to rush to market, putting more of the product on sale. And buyers should slink off home. But they can't slink off home. They haven't bought one yet - it's the housing market, dummy! "Home" is the very product on sale. It's a little more essential to life than a Teva share. So demand does not slack off.
What about supply? Well one of the features we mentioned of a free market was the multitude of suppliers. And suppliers of housing can't build on thin air, they need land. The State, mostly in the guise of מינהל מקרקעי ישראל or the Israel Land Administration (boo, loud noise, jeers) owns over 93% of all the land in Israel. The ILA is terribly reluctant to sell, and not all that keen on renting it out either. So the nanny State of Israel, as the largest landowner, is strangling the housing market, by refusing to allow supply of housing to rise.
It's not the free market that is to blame for a lack of affordable housing in Israel today. The extortionate prices of housing is a textbook indication that someone - the state, let's call it the Soviet Republic of Telavivopolis - is not actually allowing a free market to exist. Go figure.