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fighting financial dictatorship

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Years ago, when governments needed money to help their respective economies, their options were limited to taxing their own people and invading other countries.  Such measures were difficult; after all, people generally dislike taxation (with or without representation) and other countries have a nasty habit of defending themselves.  A few hundred years ago, this all changed when western government discovered that they could just print money whenever they wanted.  But when new money was printed, government bureaucrats tended to waste it on superfluous projects.  To counter this problem, monetary policy was born.  Monetary policy dictated that money would not simply be created and spent; it would be created and loaned out to job creating businesses at varying interest rates.  This would ensure that the money would be given only to businesses so that they could help the economy stabilize and grow.

When money is created from nothing, there is a price, inflation.  Everyone who has money looses some of its buying power when the government makes more money to give to itself, whether for superfluous projects or for lending.  Thus, inflation is a flat tax on money and monetary policy is a tool for collecting a flat tax without asking anyone if they want to pay it.  This is very convenient; when government levies taxes, citizens have the gall to see if there is a worthwhile reason for it and even ask that the tax be progressive.

Ancient Rome was famous for its occasional use of dictators.  Dictators would, for a limited amount of time, assume absolute power and make decisions when the public proved unable to do so.  The head of the Bank of Israel is our dictator for money.  He can decide to supersede the normal way of collecting money and lay a flat tax on all of our money by changing the interest rate and lending money.  The mark of a great Roman dictator was not his conquests, but how infrequently and precisely he used his power and ultimately, when he returned it to the people.    The head of the Bank of Israel should be the same.  In fact it is the frequency with which it uses its power and its complete disregard for the voice of the people that was caused our current financial upheaval.

The Bank of Israel has already admitted that its policy of keeping interest rates low caused the housing crisis.  The bank of Israel kept interest rates insanely low (2%) for all of 2009 and 2010, forcing investors into the only market with a decent payoff, real estate.  And since investors generally have more money than private owners, housing turned from a basic necessity to a piece of a portfolio.

The Bank of Israel insists that it had to keep interest rates low; after all, if they would not have intervened, then exporters would have failed and there would have been massive unemployment.  It was a choice between housing and jobs and Bank of Israel had to make it.

Let’s look at the alternative.  Imagine what were to happen if representatives of the Bank of Israel were to meet the citizens of Israel and explain that they will have to pay more taxes in order to subsidize exporting companies.  Public outcry would ensue, but once the cries die down, citizens would rationally ask for terms and conditions.  Okay, maybe that’s a stretch, but at least the democratically elected representatives of the people could decide on a list of reasonable terms and conditions (perhaps they would even form a ministry dedicated to finance!).  Israelis could demand that the companies submit a plan for their use of the subsidy and explain how they will become self sufficient within the next few years.  Israelis could demand that CEOs of such companies receive limited pay or that the companies do not lay off certain workers.  Then, either the company would agree to the conditions, bargain them, or choose to fold.

Instead, the Bank of Israel decided to play God with the economy and tax the people to bolster the rich.  And with the oversight of the people disregarded, the companies that benefited from the monetary policy reaped the benefits while becoming addicted to government subsidy through the low interest rates.  Now these companies are weaker than before threatening “too big to fail” if the government cuts off their crack.

But at least unemployment is low, right?  And the cost of living has not risen too much, so everything seems okay.  Not exactly.  The low unemployment rate ignores the underemployed.  There is no point in measuring the cost of living to the average or minimum wage when the dispersion of wealth is out of control and there are dozens of loopholes that that enable employers to pay workers well below minimum wage.

Since the social protests began this past summer, it has been difficult to pinpoint exactly what went wrong.  Bibi blames bureaucracy, the Bank of Israel blames the global economy and the Ministry of Finance isn’t sure who to blame because Israel still has low unemployment and solid growth – and this is the problem.  It is exactly this blaming, inaction, and relinquishing of power while denying reality that caused this financial crisis.  It was the government’s secession of oversight to the Bank of Israel and the Bank of Israel’s secession of Israel’s economy to the global economy that caused the current crisis.  As long as our representatives in the Knesset refuse to take back power from the Bank of Israel, they cannot do anything to fix the economic crisis.  And if they refuse to do anything, I suggest we get rid of them and elect representatives who will.


4 Comments

  1. Ben May says:

    The Knesset taking back power from the BoI will only turn things like interest rates into a political tool. In my experience of the British economy, the Blair government passing monetary policy responsibility over to the Bank of England in 1997 was the precursor to 10 years of solid growth, whereas previously monetary policy by successive governments had led to awful boom-bust cycles.

    • jonnydegani says:

      That is an interesting phenomenon. So the British have learned that they are better off with a leader not democratically elected than their democratically elected government. So much for democracy; long live the Queen.
      I think that this is not a point of one extreme or the other. There is no perfect middle ground between democracy and absolute power – sometimes you need to make it democratic and sometimes you need to make it more unified (like the Roman dictators). I think that Israel (and much of the Middle East) has realized that it needs to move along the spectrum and return some of its power to its people.

      • Ben May says:

        The British system worked because the public lost confidence in their so-called elected representatives doing the best job in the interests of the economy, and wanted the power to be passed on to “experts”. On the other hand, if these “experts” no longer were acting in the best interests of the economy as a whole, then there would be an issue, and it becomes difficult for the public to effect change, other than a new law moving the power to someone else. The same criticism could be made of the judiciary, which itself is a contemporary debate in Israel. Judges are there as experts – they too are not directly elected (at least not in Israel or the UK), and we rely on their expertise and doing the job fairly.

      • jonnydegani says:

        I didn’t think of it until you mentioned it, but I agree 100% with your analogy to the Supreme Court issue. The message is the same – our democracy doesn’t work and we need someone (hopefully an expert) to take the power from us. It would be nice if countries participating in a parliamentary democracy could present experts to be elected so that we could choose based on the difference. For example, let’s say Labor touted a Keynesian on staff, Likud a New Keynesian (like Stanley Fischer) and Yisroel Beitenu a Chicago School economist. Then, when people voted, they would know that an expert representing their view would be in power. I understand that there would be difference in educating the masses (via TV commercials etc), but educating the masses seems like a better solution than just throwing out democracy.

        As it stands, we get a Stanley Fisher, a New Keynesian no matter who we vote for. Just like we get Ehud Barak as Secretary of Defense, no matter who we vote for (or no matter how few votes he gets). So if the economy and Defense is already decided, what does our vote decide?

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