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Housing Solutions Part 1: Students

Unless you’ve been living in a tent

Unless you’ve been on the street

Unless you’ve been secluding yourself voluntarily from the news this past week, you have probably heard about the current tent protests.  Students have taken to the streets in an effort to demonstrate to the government the urgent need for affordable housing.  While the macro-economist in me has a myriad of solutions to offer, the skeptic in me knows that the government will not do anything (after all, they caused the problem) and the responsibility to find affordable housing will ultimately fall onto the student.

This does not in any way excuse the government from its responsibility.  The government could and should offer affordable housing to students by building dorms, building public housing, or even recognizing more universities in Israel, increasing choice and allowing students to attend schools in cheaper areas.  In a true exercise of justice, the government could have the exporters subsidize student housing; after all, it was government practices in favor of exporters that caused the rise in housing prices in the first place.

But this post will not deal with what should be; rather it will deal with practical advice for students looking for affordable housing in the current economic environment.  Here goes:

#1 – Consider housing further away from the University.  There are many cheaper housing options that are a single bus ride from the University.  Consider a student from Tel Aviv University.  This student could look for housing in Tel Aviv, or could look for one next to the central bus station in Petah Tikvah – where a single bus can take the student straight to and from the University.  Similarly, a student at Hebrew U could look for housing in Efrat and a student at Ben Gurion could look for something in Omer.  There are obvious difficulties with living further away such as the time and cost of transportation, the impact on social etc, but a simple cost benefit analysis should be done to see if such a solution is feasible.

#2 – Get more roommates, even if it means getting a bigger place.  Like the last idea, you need to check the math before applying this one to your particular case, but in many instances, getting an additional roommate can save a lot of money.

#3 – Save money on food.  Do you buy food at the cafeteria?  Well, whether you save the money on rent or on lunch, it is the same ₪ 300 a month.  Consider packing a lunch for yourself.  Choose one night where and your friends cook the food you will eat for the next week (a bowl of chili and some pasta can go a long way).  And if you’re the type to use the snack machine at school, begin buying your snacks in bulk at the grocery store.  Why spend ₪ 10 for a candy bar when you can spend just ₪ 4?  Bring a water bottle around with you and fill it at one of the schools’ Tami4 machines instead of dishing out ₪ 6 for bottled water.  This money adds up in a big way.

#4 – Cut down on luxuries.  Do you go out drinking with your friends?  Do you go to restaurants on more than a weekly basis?  Try to find cheaper alternatives – buy a bottle of alcohol and drink with your friends in someone’s apartment or on the beach.  Eat lunch with your friends in the park instead of going to another fancy restaurant.  If you smoke, stop. And for God’s sake – make your own damn coffee.

#5 – Get a part time job.  Nothing will help you learn the true value of money and how to use it responsibly like having a part time job.

#6 – Don’t buy textbooks.  With few exceptions, you will never use them.  And when you do need them, you can usually borrow them from the library (or at least use it in the library and either do your work there or photocopy the few pages you need).

#7 – Live on a budget.  There is no solution that I can think of that does not hinge on the simple fact that a planned shekel goes further.  Budgets are not just for families; they are for anyone who needs to be in control of his or her finances.

The housing crisis is just one of many financial crises that students will face in their adult life.  In the real world, it doesn’t matter if someone can write a research paper; what matters is his or her ability to juggle responsibility, family, a social life, commuting, luxuries, and expenses.  During one’s college years, learning to live on a budget may actually the most important step he or she takes towards adulthood.

Speaking of adults, in my next post, I plant to deal with housing solutions for young couples and families. 

Students:  What do you think is the most feasible change you can make in your financial life in order to accommodate housing?

no one can afford to buy a house; the demand is pushing prices too high!

Welcome back.  It’s been a very long time since I’ve posted.  I hope to go back to posting once or twice a week, learning and discussing new financial and economic topics in Israel and all over the world.  So, without further ado…

Perhaps the biggest ongoing economic saga in Israel this year is the housing crisis.  The Israeli housing crisis, more than any other economic story this year, epitomizes the showdown between market forces and the practical needs of the people.  It echoes what governments all over the world (specifically America and Europe) have been telling us for the past four years: the market is broken (even if they broke it…) and an alternative solution is necessary in order to ensure a proper way of life.

The Israeli government has tried to address this problem, but to no avail.  Even with government stipulations demanding that affordable apartments be built and that committees find new solutions still, the overwhelming majority of Israelis cannot afford to buy an apartment.  This should be no shock to anyone who has taken economics 101. Building a couple of hundred affordable apartments will only make clear that there is a tremendous shortage, and government committees have a long and proven track record of solving nothing.

Let’s get down to the details: According to this article in Ha’aretz, any mortgage payment that equals more than 30% of a workers pay is considered too expensive.  Unfortunately, the article does not mention the length of the mortgages in question (you get more for a 30 year mortgage than a 10 year mortgage), nor the specific locations that are too expensive (hint: housing in the Galil is cheap!).  Most importantly, the article doesn’t answer the most obvious question:  If no one can afford a home, who’s buying them?  It seems like the restaurant about which Yogie Berra remarked “no one goes there anymore, it’s always too crowded.”

According to my observation (read: I don’t have the money nor time to do an academic study, but this is what I think is right), in addition to the regular market of buyers who can afford houses at the current prices, the Israeli housing market is receiving buyers from an additional three groups:

(1) People who put themselves in financial jeopardy to buy a home

Many Israelis spend 40% or more of their paychecks to pay the mortgage.  A number of Israelis home-buyers with whom I recently spoke used the same phrase “my wife works for the mortgage,” implying that all the money the wife brings home covers the a mortgage payment.  Of course, economically speaking, where the money comes from is not linked to the item on which it is spent.  If a father and mother both make money and one of them gives their child ₪ 30 for candy, the money doesn’t come from either the father or mother specifically, but from the income of the household.  So too here, the couple has established an arrangement where they will be spending an extraordinarily large percentage of their household income on their mortgage.  But less you think this is entirely crazy, most rentals are also much more than 30% of take home pay; these people are merely choosing Scylla over Charybdis. 

But the danger is immense.  If either spouse looses his or her job or has a financial surprise, the couple will immediately face a financial nightmare.  While those who rent can’t just pick up and leave the second they wish, they are much more free to adjust when the need arises.  And while rent may be high, renters do not have to bear the tremendous burden of home ownership (fixing things that break etc.) so a flat comparison between rent and a mortgage payment isn’t entirely accurate.  Unfortunately, these Israelis risk following in the footsteps of so many Americans, facing foreclosure and possibly financial ruin when the slightest gust of wind pushes them off track.

(2) People who live on windfalls

Have you ever wondered how so many Israelis who just get by suddenly have money for a new car or an exotic trip aboard?  The answer is that Israelis live on windfalls.  Not merely inheritance, but pitzyuim, keren hishtalmut, even dmei havra’ah are structured to make sure that Israelis receive money in windfalls and spend it as quickly as they can.  More recently, many Israelis are simply waiting for windfalls to pay off their mortgage or give them a cushion as they pay it off monthly.  While this method has its advantages, it should be stated clearly that more and more Israeli companies are cutting back on giving a keren hishtalmut and even paying legal benefits like dmei havra’ah.  So while spending a windfall is a great idea, relying on one can be downright dangerous.

(3) Investors

When the interest rate was low, investors saw real estate as a safe investment with a 4% – 5% rate of return.  So now that the interest rate is up again, investors are leaving the housing market and prices are beginning to fall.  Yes, you read correctly; housing prices are falling.  While only a year ago Moshe Gindi assured us that prices would never fall, he has gone back on his word, giving ₪ 150,000 – 235,000 discounts to Shufersal credit card holders who buy his properties.  In other words, Gindi realized that his properties fell ₪ 150,000 – 235,000 in value and is trying to find a round-about way to say he was wrong.

In the coming weeks, I plan to explore some short term alternatives for those of us who cannot wait several years for the possibility of the market to become realistic again. 

Are you looking for a home?  What has your experience been?

milk and honey, hold the oil

Golda Meir is famously credited for saying, “Moses dragged us for 40 years through the desert to bring us to the one place in the Middle East where there was no oil.”  Her statement, although made in jest, hits on an important note for those who believe in the sanctity of the land and see it as a blessing from God.  Most of my life, I was taught in Yeshiva that God wants the Jewish people to work and pray for their food; so easy money could not be an option.  But in the field of economics, there is a different answer.  A country’s richness in oil is not a blessing; it is a curse, a resource curse.

A resource curse is a natural resource that, while bringing in money, tends to cause the country to have less economic growth and worse development than if it were to be without the resource.  Looking at Israel’s oil rich neighbors, this theory can shed light on the blessing of milk and honey, but not oil.

Countries with a resource curse become disconnected from their people and are prone to tremendous corruption.  Governments quickly become small clans who fight and cause regional conflict in order to secure the primary asset of wealth and then guard the treasure to make sure it does not leave their jurisdiction.  Pretty soon national money, which should be spent on the country’s citizens, is instead spent on bribing the right people for the right favors in order to ensure that leaders stay in power.  The government no longer sees a need in investing in education; after all, it isn’t the people who bring money to the country, it’s the oil.  In the end, this deadly combination of a selfish government based entirely on withholding from the people and massive amounts of money eventually erupts into massive civil rights violations, ending in disaster and death.

Furthermore, financial dependence on natural resources can cause many economic problems.  The Dutch curse, named for what happened in the Netherlands after finding massive amount of natural gas in 1959, occurs when the natural resource drives people to invest so much in the country that the currency rises tremendously, allowing those selling off the resource to make a lot more, but forcing everyone else working in exports to suffer tremendously (Israel’s strengthening shekel is bringing Israel a similar problem now, which through public policy, is affecting the housing market.)  Finally, reliance on a single source of income tends to cause a country’s income to be extremely volatile with all of its eggs in one basket.

Does this mean that every natural resource is a curse?  Of course not.  In fact, most of the countries with an oil curse were totalitarian beforehand, and there are many oil rich countries without totalitarian regimes.  But when the threat of totalitarianism rises, oil becomes a weapon and a means of subjugation.  Were it not for the power that oil has given our dictatorial friends, much of the Middle East riots going on now would have occurred decades ago and would have been less bloody.  Without oil, Gaddafi would not be able to hire mercenaries to kill his own people and the Kind of Saudia Arabia would not be able to bribe his people temporarily until the regional anger subsides and he returns to the height of his power.

Without oil, Mapai was unable to maintain a grip on Israel and permanently enforce a  socialist ideology on its citizens.  Without oil, Israel learned to develop its human capital and turn into a service economy and high-tech powerhouse.   Without oil, Israeli businesses learned to diversify their investments, so that while Israel was hurt in the recent depression, it was not nearly as damaged as the United States or Europe.

As for Leviathan, stay tuned…


Note:  Kashrut has always been a charged issue that brings out a lot of emotions.  This post will discuss the efficacy of the  kashrut system, not which hechsher is best.  I know there are different chumrot, histories and halachot but that is not the topic here.  Personally, I rely on any hechsher; if a Rabbi says it’s kosher, I trust her.

On February 11, Ira Glass, host of This American Life on NPR, shocked fans of carbonated beverage by revealing that the recipe for Coca Cola was recorded in a newspaper in 1979.  But while most paid little attention, Muslims were in an uproar.  Islamic law expressly prohibits alcohol and by hiding this ingredient, Coca Cola had inadvertently caused millions of Muslims to violate their sacred dietary laws.  Within a short span of time, an Israeli Muslim filed a class action suit against Coca Cola for ₪ 1.2 billion, or ₪ 1,000 for each of Israel’s 1.2 million Muslims.

This got me thinking about kashrut and the things we take for granted in our complicated kashrut industry.  What really works in the kashrut industry?  Is it better to have a centralized kashrut agency like the Rabanut or a decentralized system like the one in the USA?  What about products that Orthodox Jews consume without any certification, such as beer and liquor?  What is the best way to make sure a Jew can remain within the confines of halacha while getting a little verschnickered?

People trust experts for one of two general reasons (1) they truly believe that the expert wants them to know the truth and/or (2) they think that the expert has a lot to lose by lying to them.  In any scenario of trust, people balance these two emotions, sometimes relying on one reason, sometimes relying on both.  For example, if Sara asks Jill, her best friend, how a shirt looks on her, Sara trusts Jill’s opinion because she thinks Jill would not want her to go out dressed like a fool.  On the other hand, when Sara buys the shirt on, she trusts amazon not to abuse her credit card information because she knows that if they mess up with her money, their reputation will be at stake as well.

Kosher certification exists when people believe (1) that the Rabbis enforcing the kashrut want to sure make everything is kosher because they care about their fellow Jews and/or (2) that the Rabbis are enforcing the kashrut out of fear, be it God or a rival hashgacha (kashrut agency.)

Centralized kashrut relies on the first reason while decentralized kashrut relies on the latter.  Unfortunately in a world of growing skepticism and news agencies designed to feed paranoia, most Jews simply will not rely on centralized kashrut; most Jews feel that competition, not piety, will ensure that their food is kosher.

And it’s not like kashrut agencies are really helping.  In the US, hashgachot spread all kinds of rumors in order to destroy their competition.  I used to hear all these ridiculous stories about how the triangle K is trying to feed people treif and how OK and OU were selling their certifications to the highest bidder without checking if anything was actually kosher.  And while none of these stories were true, most of them fed into the collective paranoia.

At the same time, the little centralization there was in kashrut never failed to disappoint.  Only a few years ago, a kosher butcher in Monsey, NY was found to be selling trief chickens under a Satmar Hashgacha.  The Satmar Mashgiach assured the public that Satmar had already removed their certification from the butcher and the butcher was acting alone.  Further claims included that the chickens were from a stolen truck and that the butcher was able to buy these stolen black market chickens with no one noticing.  It was all nonsense; when an agency removes certification from a well known client, it is supposed to be publicized.  Furthermore, if the truck was stolen, the Hasidim could have found out if there was a record of a stolen chicken truck, and when it may have happened.  If the story were found to be a lie, then an investigation should go into seeing where the chickens came from and who knew about it.  But rather than look into the case and see whose hands took what money, the whole thing was just blamed on the butcher (who I am sure is to blame just as I am certain could not have acted alone) and everything went back to the way it was.  Had this been one of regular kashrut agencies, like the OU, then such a scandal would have been its demise.  Buyers would vow never to eat OU again and suppliers would switch to Star K.  But because this hashgacha belonged to a Hasidic sect and held a monopoly among its followers, people had no choice but to trust it, and it was able to weather the storm without so much as a gust of wind.

There is more than just the fear of a rival hashgacha that drives kashrut; there is also the fear of the law.  A Rabbi of mine explained to me how fear can help Jews learn if liquor is Kosher.  “Before I buy liquor I am unsure about” he explained, “I e-mail the company and ask if the liquor contains any grape products.  I state explicitly in the e-mail that I am highly allergic and if there is any grape product in the liquor, I will end up in the hospital and possibly die.”  Such a threat forces the company to check if there are indeed any grape products.  His use of e-mail is especially important because since e-mails are kept for posterity, the company is less likely to lie (as an aside, in 59 Seconds, Richard Wiseman, discusses experiments that prove people are much less likely to lie in an e-mail for this very reason).

If a Muslim had asked Coca Cola if there had been any alcohol and Coca Cola had lied, then the upcoming case would be a slam dunk.  But because the question was not asked (as far as we know now), the issue will become if Coca Cola has to volunteer such information or not.

Getting back to kashrut, does our lack of trust mean the end of all centralized kashrut, including the Rabanut here in Israel?  Not exactly.  Because other options for kashrut exist within Israel from Haredim, as well as an increasing amount of imported products with a plethora of hashgachot, the centralized kashrut is really just one among many options.  In addition, the Rabanut is trying to enforce a decentralized system within itself.  A few years ago different cities held different stringencies for shmita until the courts demanded that the Rabanut put forth one national opinion and stick to it.  Ironically, the reason that a centralized hashgacha works in Israel is not because of the centralized system it established for itself, but because it is just part of a greater decentralized system.

I pay you pay we all pay for Payis


I was going to write this as a proper article, but I’m just going to get to the point.  I hate Mifal HaPayis.  They prey on the poor and ignorant, and are nothing more than a huge deadweight loss in the Israeli Economy.

Mifal HaPayis, like most lottery games, markets heavily toward the poor and preys on desperation and the desire for quick money.  And although I am an outspokenly libertarian and believe that every person is responsible for his or her own actions, I understand that people are affected by the society around them; most parents would not raise their child in a crack den even if it meant cheaper rent.  As a society, we have chosen, and rightfully so, to help those among us who have not succeeded financially and are in desperate need of assistance.  But if we allow a predator in their midst, tempting them with easy money while branding their vice as philanthropy, then we are really just giving our money to the predator instead of giving it to those in need.

But what of all the good Mifal HaPayis does?  What of all the schools they build, the community centers they fund and the other money they give to charity?  If I steal a million shekels from you and generously give back half a million, would you say I was doing any good?  If Mifal HaPayis did not exist, our society would be richer, less welfare money would be wasted, more money would be collected through regular taxes and we would all be better off.

Instead of standing up to a deadweight loss on Israeli society, the Israeli government not only endorses Mifal HaPayis, but they allow Mifal HaPayis to  brand themselves as the builders of Israel, legitimizing themselves on schools buildings and community centers.  I am not sure of the lottery practice all over the US, but I can say that NY, even though it has a lottery, would not dare let the lottery brand itself as a saint and market itself to children the way Israel does.  Even if the lottery funds are used to build schools, the NY government understands that gambling is gambling and school children should not have to associate the lottery with tzedakah.

This past Shabbat, I noticed a flyer for a new contest sponsored by Mifal HaPayis.  This contest challenges religious Jews to submit an essay on the subject of tzedakah to be judged by a distinguished panel including a Rosh Yeshiva of Ponevezh and several other prominent Rabbis.

Let me make a point loud and clear to the distinguished Rabbis endorsing Mifal HaPayis – stop endorsing an agency that is stealing my money!  You want to make me pay more taxes to support Torah learning – fine, raise my taxes.  But do not advocate an agency designed to ensnare the poorest among us just so that the said agency can take money for itself and then decide to play God as it allocates what they think is generous.  The ends do not justify the means.

To be fair to the reputation of Israeli Gedolim, I would like to mention those who has been a major opponent of Mifal HaPayis since day one.  Rabbi Ovadia Yosef, former Chief Sephardic Rabbi and current Leader of Israeli Sephardic Jewry, has time and time again referred to Mifal HaPayis’s actions as theft and has ruled that no Jew should participate in any of their games. 

I am not a posek, but this is not simply a matter of kashrus or anything else that affects the people for whom the halacha is being determined.  The Ashkenazic Poskim who endorse Mifal HaPayis not only allow their own followers to throw their money into the trash and perpetuate a cycle of poverty, but endorse the theft of money from every tax paying citizen of Israel.

So what can we do about this Mifal HaProblem?  Educate your children to associate Mifal HaPayis with gambling, not charity.  Contact prominent Rabbis who endorse Payis and teach them to understand the error of their ways.  Finally, reverse the branding of Payis and when you see their emblem, call it what HaRav Ovadia does – theft.

what bus companies can teach us

Once every now and then, I witness an economic plan so brilliant that it simply puts me in awe.  Amid a world of cheesy jingles, repetitive commercials, and tried and true marketing plans, there are companies that really think outside of the box.  And it’s not like the economic plan I am about to discuss is to my benefit; as you’ll see, it works entirely against me.  But while I cannot declare defeat, I still tip my hat to two public fleets of horseless chariots, Dan and Kavim.

It all started with the רב-קו.  About a year or two ago, Kavim and Dan began offering a card that would allow passengers to prepay for busses, the רב-קו.  This card would enable many passengers to board a bus and pay without having to search their pockets for change.  As a result, busses spent less time at stops, drivers could focus on the roads instead of looking for change, and if this wasn’t enough, Kavim and Dan offer an additional 20% discount for all people using the רב-קו (when a person puts ₪ 50 into the רב-קו, it is considered as if he or she put in ₪ 62.50, giving the passenger more money to use, but effectively giving a 20% discount.)

But the רב-קו has another, much more important use.  By having passengers only pay for the bus once every few weeks when they recharge their cards, passengers no longer pay attention to the amount they are paying per ride.  This has two benefits for Dan and Kavim (1) passengers may take more busses, not noticing how it depletes the amount in their card and (2) it allows Dan and Kavim to jack up the rates without anyone noticing.  In economic terms, passengers tend to spend more when they do not notice the marginal cost.

Teaching the consumer to ignore the marginal cost allows the consumer to turn a blind eye most of the time and lead to tremendous increase in spending.  Conversely, if the public truly wanted to see a reduction in the usage of a good or service, the best thing would be to have the consumer actively pay for it more often.  Imagine how you would control your water usage if you had to pay your water bill at the end of every day.  Imagine how you would curb your electricity usage if you had to feed a meter, the way people did many years ago.

What really is catching my eye is the extent to which Dan and Kavim are going to make consumers more and more insensitive to price.  A few months ago, when a passenger used a רב-קו, the bus driver would print out a receipt, which would contain how much the passenger paid and how much is left on the רב-קו.  Nowadays, drivers no longer print out a receipt unless requested.  Dan and Kavim are willing to forgo any lost revenues by people who sneak onto busses in order to ensure that no one has a ticket and that those who do pay become increasingly insensitive to the price.  In contrast, Egged spends thousands hiring guards to board busses and check receipts while making their drivers pay enormous fines if a single passenger is missing his receipt.  Dan and Kavim have uncovered a simple economic fact: the gain of price insensitivity greatly outweighs a couple of hundred free riders; seeking out enormous potential profit is worth much more it than plugging a few holes.

As a single consumer, I am powerless against Dan and Kavim.  I cannot ignore using the רב-קו; I would just be paying 20% more and not proving anything to anyone.  All I can do is advise that if you ride Dan and Kavim busses, always ask for a receipt and try to be sensitive to price.

More importantly, I think it is worth learning from Dan and Kavim.  Sometimes it is more important to look for new prospects than plug existing holes.   Driving yourself crazy to chase down every little bargain and pay the least for everything is not worth as much as allowing some flexibility and utilizing your time more wisely.  Next time you’re on vacation, instead of just going according to plan, allow for skipping some stops and exploring new possibilities as you see them.  Managers, instead of micromanaging your workers, allow some flexibility; your workers are likely to pay you back with a redoubled work effort.  Sometimes when you give an inch, you really will get a mile.

homes and exports – walking a tightrope


A couple of weeks ago that the media exaggerated some statements by the Ministry of Finance and the Bank of Israel to make it look like a full blown brawl was about to erupt.  In summary, the Bank of Israel raised interest rates and the Ministry of Finance wanted to make sure that foreign currency was still being bought on a regular basis.  No one even threw a chair.  So why all the hullabaloo?

Right now we are in the middle of a double edged crisis – on one side we have a housing bubble and on the other side a looming export crisis.  According to many economists, the Bank of Israel and the Ministry of Finance were disagreeing about which problem to tackle and which to ignore, assuming both are mutually exclusive.

Before passing judgment, it is worth taking a closer look at these two problems and how they impact our lives.

Let’s begin with the housing bubble, or as I call it, “The Jon Degani will never be able to afford an apartment crisis.”  Prices are rising for a couple of reasons:

(a) Investors – two types of people generally buy property, people looking for a home in which to live and investors.  When we have a bad market (and low interest rates abound), then investing in an apartment is a pretty good deal.  If an apartment costs ₪ 800,000 and it receives rent of ₪ 3,000 per month, then investing in an apartment is a solid investment with a return of 4.5%.  I know it doesn’t look like much, but it makes for a nice piece in the portfolio, especially when other investments perform so poorly.

(b)  Everyone else – when money is cheap to borrow, people tend to borrow more of it.  So when interest rates stay low, soon-to-be homeowners are able to borrow larger sums and pay more for housing, driving up prices.

(c) People leaving the periphery –As more people migrate toward the center of Israel, the demand for housing increases and the prices rise.

It would seem that the simple solution here would be to just raise the interest rate.  When the interest rate is higher, less money is borrowed, less money is put into the economy and inflation is curbed.  Also, with higher interest rates, investors will leave the real estate market and move toward government securities.  Unfortunately, not every solution is so simple.  Increasing the rate of interest would worsen our looming export crisis.

Our export crisis: 

Israel is an exporting country.  Correction, Israel is a country that imports a lot of goods, fixes them up and exports them for a profit (if you look at Israel’s major imports and exports in the CIA factbook, you’ll notice that our imports and exports are mostly the same).  In fact, over 40% of our economic activity comes from exporting (source) and if the shekel were to be too strong, exporters would loose a tremendous amount of money.  How so?

Let’s say that $1 = ₪4 and diamonds are $1 a kilo raw, $1.50 per kilo polished.  Israel imports one kilo for $1 worth of diamonds for ₪4, polishes them and resells them for $1.5 = ₪6.  This would earn Israel a ₪2 profit.

Now let’s say the shekel gets stronger and $1 is worth ₪3.  Israel imports one kilo worth of diamonds for $1 (₪3), polishes them and sells them for $1.50 = ₪4.50.  This would only earn Israel a profit of only ₪1.50

When the shekel gets stronger, imports and consumer prices drop causing customers to pay less and sellers to profit less.  Since Israel is the seller, Israel prefers for the cost to be higher so that it can profit more.

As the dollar plummets, Israel risks the shekel getting too strong, hurting not only exports, but all businesses tied to them (for example, the diamond polishers mentioned above).

So how can Israel solve this problem?

1 – Israel’s central bank can lower interest rates, driving down the value of the currency.  But of course, this would worsen the housing crisis so the Israel’s central bank chooses to…

2 –Buy dollars every day.  By buying dollars, Israel adds more to the supply of shekels, driving down the value of the shekel compared to the dollar.

“Hold on a second” you may ask.  “If we artificially inflate the exchange rate, then exporters profit at the expense of private citizens who have to pay higher prices for consumer goods.  Why should the producers be allowed to profit at the expense of the consumers?  If the prices have legitimately dropped, then let them get used to the new economic reality!”

Good question (thank you).  The truth is that if the dollar were to permanently fall, then the Bank of Israel would be stupid to try to maintain an artificial exchange rate; it would only end in another bubble bursting eventually.  But the Bank of Israel does not think the dollar will fall, at least not permanently.  The Bank of Israel is afraid of what will happen when the exchange rate, whatever it is, becomes too volatile.

Austrian Economist Eugen von Böhm-Bawerk explained this problem in his capital theory.  He explained that one of the problems with capital is its inability to be easily transferred.  This inability can spell disaster to a business in a volatile economic environment. 

Now in English:

Let’s say I decide to invest in building boats.  I invest thousands in machinery, raw materials, and manpower hoping to get a profit.  Now, after I spent millions trying to build boats, someone invents tiny hovercrafts that hover above water.  No one wants to get wet anymore and my boats become completely useless.  So I default on my loans, file for bankruptcy and end up penniless looking for a new business venture.  Maybe I’ll make tiny hovering plains.  But then the next year I find out that using small hovercrafts causes cancer.  The hovering system used a terrible chemical and the entire system becomes illegal.  Now boats are in high demand.  Unfortunately for me, I had to break all the ones I made into scrap to try to repay my debt.  Now I’m broke again.

Imagine that we decide to tell the exporters to go fly a kite and let the market work it out for them.  They become less profitable and investors move their money to other businesses such as pharmaceuticals where they can get a better return on investment.  The import / export companies fire thousands of workers and the pharmaceutical company begins hiring and training.  Now, a year later, the dollar gets stronger and investors move their money back.  The pharmaceutical companies have to fire thousands of workers and the import / export businesses begin rehiring and training.  Both firms wasted millions, if not billions, due to the turnover they suffered because of the fluctuation in the dollar.  In a few years, both of these industries will be considered too unstable and no one will want to invest in either of them.

And so, our government is doing what it can to try to make these businesses a bit more stable.  They cannot stop all fluctuation, but by using a couple of monetary tricks, they can help the import / export companies ride out the boom – bust – boom they expect to see in the American economy and the dollar.

So that’s our financial crisis in a nutshell.  In some of the coming posts I plan to discuss some of the repercussions of this crisis and how it affects our everyday lives.

What do you think?

PS – If you’re wondering, Eugen von Böhm-Bawerk is pronounced Oygen Bom Boverk

you say “tomato” I say, “really?! where?!”

Unless you’re a very strict carnivore, you’ve probably noticed that the price of tomatoes in Israel has skyrocketed while the quality has plummeted.  According to an article on Ynet, stores in Israel are blaming the hot summer and low supply during the High Holidays for the expensive low quality tomatoes.  But this only tells one piece of the story.  Israeli farmers are still producing better quality tomatoes for export, but we in Israel are unable to buy such tomatoes, even if we are willing to pay more.  Why is this?  Where have all the good tomatoes gone?

The answer to this economic conundrum is what is commonly referred to as the “shipping the good apples out” theorem.  This theorem was developed by economists Armen Alchian and William R. Allen when observing a letter written to a local paper asking why no good apples were available to purchase in the region where the apples grew.  Alchian and Allen explained that when two grades of a product are increased by a fixed per-unit amount such as a transportation cost or a lump-sum tax, consumption will shift toward the higher-grade product. This is true because the added per-unit amount decreases the relative price of the higher-grade product (thanks wikipedia!)

Okay, now in English:

Suppose that better quality tomatoes (BQ) cost ₪ 25 a kilo and lesser quality (LQ) tomatoes cost ₪ 10 a kilo.  This means that the cost of eating one kilo of better quality tomatoes costs the same as eating 2.5 kilos of lesser quality tomatoes or 1 BQ = 2.5 LQ.  

Now suppose that it costs ₪ 5 to ship a kilo of tomatoes out of Israel, no matter what the quality.  This means that outside of Israel BQ will cost ₪ 30 (25 + 5) and LQ will cost ₪ 15 (10+ 5) or 1 BQ = 2 LQ.

Since the relative price of BQ to LQ changes, the people who live out of Israel consider it more worthwhile to buy the better quality tomatoes.  This will ultimately drive up the price out of the country and make it more worthwhile for producers to ship their better tomatoes abroad.

This theorem has plenty of applications beyond produce.

1 – War – According to some historians, this theorem explains why the North’s blockade was so successful during the American Civil War.  During the Civil War, blockade runners mostly smuggled in luxuries, not necessities, leaving the South to starve.

2 – Criminal Policy – By giving harsher punishments to marijuana users, the government may actually encourage marijuana users to use harder drugs like cocaine and heroine.

3 – Other Luxuries – According to Economist Tyler Cowen, the Alchien – Allen theorem implies that Australians drink better quality California wine and Californians drink better quality Australian wine.

Getting back to tomatoes.  My personal advice in the short run is to try to buy fewer tomatoes and that the tomatoes you do buy should be cherry tomatoes.  Cherry tomatoes may cost a bit more (I bought a kilo for ₪ 15 last week) but they last much longer, so you know that while you are spending a lot of money, you will at least be able to cut down the risk of wasting tomatoes that already cost an arm and a leg.  Also keep tomatoes in mind a week from this Friday when we begin asking for rain (“ותן טל ומטר”).

 On a happier note, clementines hit the market recently. They are tasty and very cheap (₪  5 a kilo.)  Maybe I’ll have a fruit salad instead…

the housing bubble

Haaretz has a fantastic article explaining the real issues behind the current housing crisis in Israel.  The piece, written by the CEO of Psagot Compass Investments, explains the rarely heard economic side of the issue

“Five years ago, in the summer of 2005, an investor bought an apartment for rental purposes: a small studio apartment in a new building but in an unattractive, congested area of south Tel Aviv. He paid NIS 430,000, using his own savings rather than taking a mortgage. At the time he could expect to rent it out for from NIS 2,400 to NIS 2,500 a month. Rental income of NIS 30,000 rent a year on an investment of NIS 430,000 translates into returns of about 6.5% a year. Israeli government fixed-income Shahar bonds would have yielded roughly the same return, in nominal terms.

Investing in property isn’t like investing in government bonds. Like every instrument of investment, it has both benefits and drawbacks. On the minus side are the headaches of being a landlord, the risk of getting stuck with a bad tenant and occasional expenses.

Unlike nominal bonds, however, rents and home prices tend to keep pace with inflation, and up to a certain threshold rental income is not taxable. Capital gains from bonds are taxed. In any event our man went for the property, not the bonds.

Five years later, where are we? The monthly rent rose to NIS 3,000 a month, representing an annual increase of around 4.5%, or between 20% and 25% over the five-year period. That wasn’t a meteoric pace, it was roughly the same as inflation.

But the purchase price is another story altogether. Similar apartments sell for NIS 800,000 today, meaning it rose by by 80% in five years, far outstripping the increase in rent.

In 2005 the return on investment was the same as nominal government bonds. Now the equation is NIS 800,000 (apartment value ) divided by NIS 36,000 a year (rental income ), which works out to 4.5% – the same as the return on Shahar bonds. In other words, that didn’t change in the five years.

That, dear reader, obeys the laws of economics and financing. When long-term interest rates drop, the price of income-generating properties rises. The longer the lifetime of the assets, the more their prices increase. Those are the laws of mathematics. Since property has a long lifetime, its price rises significantly when long-term interest rates drop.”

Some points of interest:

 1 – As one commenter pointed out, if this is true, then investors should buy properties when long term interest rates rise and sell when they are low.  The opposite would be true for private individuals buying a home in which to live.

2 – As long as the US keeps interest rates low and we match it (in order not to drive up the shekel and hurt exports), then the housing bubble will likely continue.

3 – Regulations aimed at keeping people from buying homes (more money down, stricter requirements, higher interest rates) will likely remove the buyers that are buying to live in the homes (and are paying via mortgage) but not those who investing (and often have the money up front via a mutually fund of some sort).  As a result, there will be a small dip in price, and then a rush for more investors to push into the market, probably inflating the bubble more before it bursts harder.

Do you think the government can do anything to fix the solution or just make it worse?

7 book reviews

As an Israeli who uses a lot public transportation; I have plenty of time to kill en route.  Normally, I’d listen to music, but about a year ago, I decided to start listening to audiobooks.  It wasn’t such a huge jump; after all, I was already listening to podcasts.  So just take a series of podcasts and walla! – it’s the same as an audiobook.

The following are reviews for 7 books on money and/or economics that I listened to over the past year:

The Total Money Makeover: A Proven Plan for Financial Fitness by Dave Ramsey.  This is the book that kickstarted my entire financial transformation.  Before this book, I was tracking some expenses, but not sure why, and my college debt was getting worse.  My wife and I argued over money and we were unsure what we were arguing over because it’s not like we had any savings or any way to monitor what was going in or out.  Dave Ramsey’s organized methodology allowed us to clean up our finances, begin living on a budget and start taking control of ourselves financially.  And while it is true that Dave’s system needs to be adjusted for Israel, his outlook on money and more importantly, his can-do attitude speak universally.  The audio, read by Ramsey himself, was energetic and motivating.

Freakonomics and SuperFreakonomics by Steven Levitt and Stephen Dubner:  I love these books.  These are the best two books on economics that I have read in my entire life, hands down.  Freakonomists Levitt and Dubner apply the principles to economics to just about every part of life, including gangs, global warming, and how to be a good parent.  Even if you disagree with their theories, the material they chose to analyze is incredibly fascinating and will help you use microeconomics to discover “the hidden side to everything.”  And for those considering the audiobook, Dubner is a fantastic reader.

The Tipping Point by Malcolm GladwellThis book has an interesting premise, but probably could have been summarized in a long pamphlet.  And to make matters worse, Gladwell has a horrible reading voice.  If the subject of the tipping point interests you, I would refer you to the wikipedia entry which covers the entire book without the superfluous detail.

Predictably Irrational by Dan ArielyDan Ariely, an Israeli-American who suffered third degree burns and a long recuperation process at Rambam, used the experience as a jumping off point into the world of behavioral economics.  Most of the book deals with small economic experiments (using college students of course), behavioral patterns that emerge, and practical advice.  The book could have been a bit shorter, but all in all was an entertaining and educational read.  Also, unlike Gladwell, Areily realized that his voice was not suited for reading and got some British reader to read the book for him (it is kind of funny to hear him mispronounce the names of Ariely’s Israeli family members.)

The Undercover Economist by Tim HarfordTim Harford can best be described as a fantastic journalist, but a sub-par economist.  The book is clear, interesting and informational, but discusses simple economic topics that are covered in the most basic of economic textbooks.  With the exception of the chapters on supermarkets and China, the book will most likely bore the heck out of anyone who had ever taken even an elementary course in economics.  To add insult ton injury, the reader of this book was annoyingly slow.  Next time Tim Harford needs a British guy to read one of his books, he should ask Dan Ariely for some advice.

The Making of Modern Economics:  The Lives and Ideas of the Great Thinkers by Mark SkousenAs my approbation of Dave Ramsey proves, I like authors with strong personalities, and when listening to history, nothing is more boring than a bland list of facts and events.  In this respect, Mark Skousen’s history offers a unique, interesting history of the people and concepts that shape the Austrian and Chicago Schools of economic thought and the challenges that they faced throughout the ages.  Unfortunately, Skousen ends up repeating his narrative ad nauseum while failing to either mention or significantly explain many important concepts in the history of economics.  It may be one of the best books on the subject of economic history, but it still has a way to go.  Audio was decent, not as bad as Gladwell, but not as good as Dubner

Do you have any good books about money or economics that you can recommend?