For Americans traveling in Israel at Thanksgiving time, as I am this year, they are in for a special treat, because hotels and restaurants offer turkey dinner with all the fixings, something that happens in few other foreign cities. And the Israelis really know how to cook turkey American style!
But when it comes to issues of economics, Israelis are not so empathetic with Americans and their excessive addiction to debt. In fact, they are downright shocked at the level of what they consider to be sheer profligacy by U.S. consumers.
An important difference between the consumer banking and credit system in the U.S. and the one in Israel is in the role that the bank paid. In Israel, the bank acts as a true fiduciary, both in respect to the guidelines it establishes for consumers, ensuring that they do not overextend themselves, as well as in respect to the bank’s obligation to it’s shareholders. Banks in Israel abide by lending principals that once existed in the U.S., but unfortunately were abandoned in the interest of extending home ownership to everyone, even those who had not earned the financial right to own a home. Despite Israel’s far more stringent guidelines regarding down payments and income coverage of mortgage payment, a full 70 percent of Israelis actually own their own homes and the default rate is negligible if even measurable. That exceeds the level of home ownership in our own country.
Perhaps if U.S. banks and credit card companies had not tempted consumers to over-extend themselves, only to find themselves paying usurious rates of interest, that money might have been saved until it provided for a meaningful down payment on a house with a mortgage that could have been supported by take-home pay that was not instead going to pay outrageous interest charges on outlandish credit card debt.
Israelis are astounded at the extravagant use of credit cards in the U.S. Everyone I spoke to, including those in banking and investing as well as individual business owners and merchants, found it unbelievable that any one might have, much less need, more than one credit card. The benefit of a credit card for most Israelis is that it reduces the need to carry cash. Most of them use their credit card as a debit card, and for those who use it as a credit card, the banks strictly limit the amount of credit available, and then the banks automatically deduct payment within 30 days of the charge. So, there simply is no opportunity to build up endlessly growing debt and the concomitant usurious interest charges.
So why has the Israeli stock market fallen as far as the U.S. stock market this year? If their consumer debt is almost nonexistent and they have no mortgage problems, why are their stock and bond markets so linked to ours? For one, Israel’s economy is hugely tied to the fortunes of economies around the world. With few natural resources of its own, Israel must import all of its gas and oil. Exports plus imports equal nearly 80 percent of the country’s GDP in contrast to less than 20 percent in the U.S. The U.S. is Israel’s largest trading partner and trade with the EU as a block exceeds that with the U.S. So when the U.S. and the EU sneeze at the same time, as they most certainly have done right now, it is not surprising that Israel catches a nasty cold.
But Israel also has its own debt related problems. Some of the most successful entrepreneurs, know as “The Four Tycoons”, have borrowed extensively to invest in real estate around the world. That corporate debt is held significantly in the pension portfolios of Israel’s major companies, and as the real estate market around the world has sharply deteriorated, so too have the fortunes of those moguls. In fact, the leverage employed by those few giant conglomerates is as high as 20 to 30 and even 50 to one. The business headlines are full of the dire implications associated with the default of one or more of the “tycoons”, and there is a high level of anxiety because the health of the corporate bond market is on such shaky ground.
And so we witness a highly technologically sophisticated economy, with a generally high level of education and a culture of savings and investment that would be the envy of our own economy in the U.S., sharing in our stock market woes. Globalization, for all its long term benefits for economies both established and emerging, is a two edged sword.
Patricia W. Chadwick has had more than 35 years of investment experience. She is the founder and president of Ravengate Partners LLC, a consulting firm that provides advice on financial markets and global economics.