6 economic myths

Stormy periods in the markets are the best time for spreading economic myths. Under the guise of “discussing the crisis,” charlatanism flourishes. Below are six myths that are being discussed within our economic discourse these days:

1. Those who criticize financial capitalism wish to live in North Korea or in a dilapidated hut. That’s nonsense. Wall Street-style capitalism is only one of the models based on private ownership and competitive market (what’s wrong with the enlightened and social capitalism in place in Finland and Holland?), yet it’s the most radical model – both radical and failed, as was proven in many ways in the past decade. The governments were the ones to save it from collapse in 1998, 2001, and 2008. What else needs to happen so that the blind Wall Street worshipers in our country will realize that a stable stock market that inspires trust cannot exist without deep government involvement, including ownership of some of it? Even the Republicans in America understand this by now.

2. The crisis stemmed from the greed of managers and investors. Greed is a permanent human characteristic, for better or for worse, depending on the socioeconomic system they live within. If people are given the right incentives and a supporting public environment, they will engaged in creative work based on those same qualities. In the past year, we saw the Wall Street method collapse, not the people of Wall Street, who are no different than us. Only dark totalitarian regimes dream of engineering a new kind of human.

3. The Americans exploited the Chinese and are now paying the price for it. Nobody exploited the Chinese; The Chinese made use of the world as a limitless market for their cheap products and as a lever for an 800% rise in their standard of living. Because of low salaries in China – which have remained particularly low due to the ongoing artificial devaluation - millions of workers in the developed world have lost their jobs. The Chinese are the great beneficiaries of globalization, while blue collar workers at industrial countries are the big losers.

4. Thanks to the restrained state budget, the Israeli stock market shows strength compared to its American counterpart. That’s an illusion: Since the start of the year, the stock market indexes in Tel Aviv dropped by 42%, compared to 35-37% in the New York and London exchanges. The image of Tel Aviv’s strong stock market has to do with the holidays. Because of the holiday season, the vacillations around here were less sharp. To the regret of finance ministers, there is no difference between stock market drops in countries with state budget surpluses (Ireland) or deficits (Britain). The storm washed away all of them.

5. The Bibi-Bachar reforms made Israeli banks strong. Not really. The reform forced the banks to sell their provident and education funds, and by doing so endangered first and foremost the citizens who are interested in long-term saving. As their activity in Israel was limited, the banks used the money they earned from selling those funds for tempting investments abroad. Upon the beginning of the crisis, the banks had to write off billions of shekels. Therefore, the Bibi-Bachar reform weakened the banks’ staying power, yet they are strong and conservative enough to survive honorably.

6. Deep recession in Israel is unavoidable, and therefore we should start saving up for a rainy day. The opposite is true. Now is the time to lower saving activity and spend. Israel has large foreign currency surpluses and it can afford to embark on growth led by local consumption and investments. These will compensate for lower demand abroad. The Israeli technology and software industry is flexible and quick-reacting, and it will not necessarily shrink. The decline in oil and raw material prices is worth an annualized $5 billion for Israel; that’s a 2.2% addition to the rise in production. If the politicians and commentators won’t scare us with talk of a deep recession, we won’t have a deep recession.