Jun 19, 2017

The War on Israel's Consumers

A Guest Post by Dr. Harold Goldmeier

The Bank of Israel Prepares for a War on Consumers
I just read a frightful interview Globes conducted and posted to its web site on June 15, 2017, with the Supervisor of Israel’s banks, Hedva Ber.

Supervisor Ber warns consumer debt is rising at too rapid apace and approaching “out of control.” Thus, her office is considering stringent measures to brake consumer borrowing. It sounds like the Supervisor’s office is preparing to declare war on Israel’s already financially strapped and struggling citizens. Household debt (not for mortgages) tops NIS 511 billion. NIS 325 billion is collateralized by equity in houses.

Household debt is caused by too little income to pay for food, clothing, utilities, health insurance, prescriptions, etc.  A Taub Center staff report (February 28, 2016) confirms that, “Israelis feel it in their pocketbooks—living in Israel is expensive. High prices on basic necessities combined with low wages relative to other developed countries lead many Israelis to struggle to make ends meet.”

For example, it is widely reported Israelis pay 48% more for toiletries than consumers abroad; food prices are 25% higher than in Europe; Israeli made chocolate cost more in Israel than in Europe. Salaries of teachers rank at the bottom of 34 other developed countries (worse in terms of purchasing power parity), and less than Mexico’s teachers.

Courtesy THE BLOG on HUFFPOST Tom Ostapchuk Jan 13, 2017

The Missives
Ber warns her Banking Supervision Department will not stand idly by watching debt grow.  “We have reached the point where we have to be careful,” and if these conditions persist, “we’ll intervene. We have many tools, and we won’t hesitate to use them.” Sounds like the language President Trump uses to ISIS and North Korea.

The Shattering Reactions
I won’t speculate how and when the Ber will take action, but there will be severe consequence for the Israeli people.

A credit crunch will

·         Spark consumer credit shock spreading amongst the working poor, unemployed and underemployed. These classes make up the bulk of the borrowing public
·         Loans from banks will dry up and fees for loans will sharply increase
·         Citizens are likely to default on existing loans and mortgages in favor of putting food on the table, buying medicines, and paying expenses for children
·         The numbers of homeless will increases and small businesses go under
·         People will cutback on retail purchases
·         Mortgage defaults will drag down housing prices and undermine bank solvency
·         Monthly interest rates for mortgages are already on the rise tied to a tenacious web of international benchmarks: LIBOR, foreign currency rates and more; concomitantly, people depending on overseas income from work and family watch the dollar and pound exchange rates tumble exacerbating the deterioration the living standard in Israel
·         More Israelis will throw-in-the-towel, and join the approximately 1.5m Israeli Jewish ex-pats (@12% of the population) living overseas
·         Mass aliyah is not going to happen according to the Jewish Agency, and 30% of olim leave Israel within three to six years because of the economic hardships
·         Tighter credit and the US lowering its corporate tax rate to 15% will encourage Israeli companies to relocate with their jobs

Good Intensions Are Not Enough
Let’s hope Ms. Ber and her colleagues don’t initiate actions they threaten that blame the victims for unsustainable consumer credit levels. Let’s urge her to close the flaring income gap between rich and poor that presents more of a threat to Israeli society. 10% of Israeli children already go to bed hungry (14,513 in 2006 compared to 17,677 in 2017), according to Israel National Council for the Child.

Household debtors are not enemies of the State. They are survivors. Ms. Ber, keep that in mind. To quote a famous American, “The nation is prosperous on the whole, but how much prosperity is there in a hole?”

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  1. How is the BOI supposed to "close the gap between rich and poor"? By transferring money directly between accounts? By not letting banks manage rich accounts unless poor people have them too?
    What the BOI is responsible for is preventing another credit bubble a la EnRon which would bring down the entire economy - rich and poor alike. If the banks foreclose on the "rich", those poorer people will still be fired, lose income, and need to default in order to eat - and they won't have any hope of future income to boot.

  2. Lots of good points.
    Some more: despite the scaremongers about the slight increase in the mortgage interest rates (the banks should be investigating for that), mortgage defaults are low and not rising, actual foreclosures are relatively rare, and hotza'ah lefoal case are also decreasing.
    A main problem are the car loans and another one is the ability to take loans from numerous places, especially the private firms that pop up all the time.

  3. This is a great lead-in to an Economic Reform webinar that I am running this coming week: https://zehutint.lpages.co/gilad-alper-webinar-register/
    Gilad Alper, an advisor to the Ministry of Finance is presenting the Zehut Economic Reform policy. You all should sign up.


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