Expert witness syndrome

The Jerusalem Post
22 Sep ’04

Did you ever hear expert witnesses – reputable professionals – cast doubt on a matter they are so generously paid to advocate? Of course not.

Expert witnesses are handsomely rewarded to deliver.

Additional lucrative assignments would not materialize should they fail to be totally loyal to their clients’ cases.

So it is hardly surprising that the Promontory Financial Group members hired by Israeli banks to undermine the credibility of the governments’ Financial Reform Plan tried to do what they got paid to do.

“We are hired because we are objective,” the four insisted.

Let’s examine the evidence.

Filed under:

financial markets

Israel's bank duopoly

Did you ever hear expert witnesses – reputable professionals – cast doubt on a matter they are so generously paid to advocate? Of course not. Expert witnesses are handsomely rewarded to deliver. Additional lucrative assignments would not materialize should they fail to be totally loyal to their clients’ cases.

So it is hardly surprising that the Promontory Financial Group members – Eugene Ludwig, a former US supervisor of national banks; Alan Blinder, a former vice chairman of the board of the Federal Reserve; Alfred Moses, a top Washington financial lawyer; and Elizabeth McCaul, a former US banking superintendent – hired by Israeli banks to undermine the credibility of the governments’ Financial Reform Plan tried to do what they got paid to do.

“We are hired because we are objective,” the four insisted.

Let’s examine the evidence.

Blinder, the group’s top economist, opened the charge against Finance Minister Binyamin Netanyahu’s courageous reform with what he believed was a clinching argument, that “the separation of provident and mutual funds will end up hurting small creditors. Banks will become less diversified,” he fears, “and as a result less financially stable,” and this will prevent them from lending to small businesses.

This opening salvo reveals all that is wrong with the group’s expert opinions. They are mostly based on vague and questionable generalities and on irrelevant comparisons. They also betray a woeful ignorance of Israeli financial markets.

The fact is that the wide diversification already existing in Israeli banks, which the learned experts would have us perpetuate, has not made Israeli banks “stable.” Nor are they inclined to promote a “free, transparent atmosphere conducive to competition.”

The extreme size of the bank duopoly – which Blinder considers desirable because he fancies that it would enable them to become world players – has actually made them extremely inefficient. They are anything but competitive and transparent. This may explain why they have failed to become world players so far.

While acknowledging that a “disease” inflicts our banking system, Blinder and his colleagues have almost nothing to say about its catastrophic history and present dysfunction.

Could it be ignorance? Moses admitted that much. Indeed, when asked some specifics, the experts failed the test. Instead, they repeatedly referred to what happened in America or to world “trends” without considering how relevant they are to the anomalous Israeli situation – the total absence, for example, of non-banking financial markets.

They drew simplistic, wrong parallels between a competitive American banking system and our banking duopoly that squelches all competition.

In short, they prescribed from theory with little regard to our distorted banking system.

If, as Binder suggests, great size, diversification, and stability would motivate Israeli bankers to lend to small businesses, why did the opposite happen? Why did our banks lend over 70 percent of credit to only 1 percent of borrowers?

Altogether, what makes an excellent economist like Blinder believe that lending to small businesses entails greater risk, when in fact the opposite is true, particularly in Israel where the banks have accumulated NIS 61.4 billion in questionable debts by lending mostly to large, well-connected borrowers?

Our expert witnesses also underestimate the dangerous consequences posed by the conflict of interest that bank ownership of provident and mutual funds promotes. True, their (and the Bachar task force’s) recommendation to have the banks get an even commission on all mutual and provident funds they sell may motivate the banks to sell other banks funds as well. But this does not address the chief problem that bank ownership of funds poses: the bankers’ habit of exploiting the great buying power of the funds they own.

As Bank of Israel studies disclose, banks have exploited their fund ownership and their position as underwriters to sell their own funds’ inferior shares at inflated prices. This has helped cover their huge losses on loans and to finance management’s extraordinary pay and perks, extensive featherbedding, and inflated salaries for bank clerks.

What is worse, however, is that our expert witnesses ignore the terrible consequences of the perverse banking system that they advise us to preserve: the 20 years of non-growth caused by its failure to make productive loans. The incompetence of our bankers has translated into massive unemployment and such low wages that hundreds of thousands of families cannot make ends meet.

Here is what the experts should know:

  • Billions of shekels are virtually stolen from savers by rapacious bankers who exploit their duopoly position to pay less than market rates on savings.
  • There is collusion between the bankers and the monopolies to which they provide subsidized loans. Hard-working Israelis are forced to cover the bankers’ losses by extortionist bank fees.
  • Low-paid, highly taxed Israelis have to sacrifice about half their salaries as “rents” to the banks and their partner monopolies.

    “We are not aware of any governments today that are moving in the opposite direction [to universal banking] except Israel,” the experts conclude.

    Had they really bothered to study Israel’s economy, they would understand why.

More recent commentary

The New Republic
19 May ’11

Economic Miracle

A Middle East peace strategy that could actually work.

The Jerusalem Post
15 Mar ’11

The government-tycoons-media triangle

Israel needs to slash its state budget by as much as possible if it wants a chance at fighting waste and corruption.

The Jerusalem Post
9 Mar ’11

Welfare and rebellion: The economic factor in the Arab uprisings

Too little attention has been paid to how Egypt’s socialist past and welfare-state present shaped the current rebellion.

The Jerusalem Post
7 Feb ’11

Is all quiet on the economic front?

The Herzliya Conference has become an important international event, but one central issue is absent: Israel’s debilitating economic concentration.

The Jerusalem Post
22 Jan ’11

Teaching an elephant to dance

It’s highly unlikely that government can ever learn to make long-term plans and execute them efficiently.

The Jerusalem Post
23 Dec ’10

Hellenization and Enlightenment: Post-Hanukka ruminations

How can one dare compare narrow-minded religion with the all-embracing faith of universality and equality that is socialism?

The Jerusalem Post
1 Dec ’10

Would Milton Friedman have approved?

Many of the social and economic troubles we are experiencing are due to the public’s lack of understanding of the need for economic literacy.

The Jerusalem Post
17 Oct ’10

Perverting public discourse

The PM’s courageous decision to tackle economic concentration was misrepresented by several of our media publications—owned of course by tycoons.

The Wall Street Journal
8 Oct ’10

Breaking Israel’s monopolies

Economic concentration hurts the country’s viability and the chances for peace.

The Jerusalem Post
4 Oct ’10

Israel’s progress undermined

A damaging ethos of ‘welfarism’ and distributive politics has come to dominate not only academia but our cultural, military and even our business elites.

The Jerusalem Post
19 Aug ’10

Unable to decide

The reformers must know the importance of the reform’s success both for Israel and for their careers, and what damage they will incur if it fails.

The Jerusalem Post
13 Jul ’10

Elana Kagan, terrorism and the law

Kagan’s admiration for Justice Aharon Barak’s philosophy may have revealed her own predilection for radical judicial activism.

The Jerusalem Post
30 May ’10

Yes, break them up

We must dismantle the oligarch-owned monopolies that impoverish the Israeli consumer and choke our economy.

The Wall Street Journal
18 May ’10

Land of silicon and money

The OECD’s invitation to Israel is a “seal of approval” but the country still needs more reforms.

The Jerusalem Post
10 Feb ’10

The surprise of it all

The world’s astonishment at Israel’s response to the Haiti disaster is insulting. What we saw there was Israel’s true face.

The Jerusalem Post
10 Jan ’10

Hi-tech prospects and pitfalls

Individual initiative and freedom are essential for creativity—in hi-tech as in all other spheres.

The Jerusalem Post
14 Oct ’09

A woman who knew her worth

As far as Rose Friedman was concerned, public kudos did not matter that much. She persisted in being a rose, no matter what.

The Jerusalem Post
22 Sep ’09

Movies in Nablus, dramas in Bethlehem

Lasting peace must grow from the bottom up, from an “economic peace process” that proves what advantages peace has to offer on a daily basis. It cannot come from signing peace agreements with radical and corrupt entities propped up by corrupting Western handouts.

The Jerusalem Post
15 Aug ’09

Israel’s ‘scrambled’ economic system

A courageous recent film has exposes the strong connection between Israeli oligarchs and bureaucrats. Unfortunately however the film’s simplistic pseudo-Marxist treatment is more misleading than revealing.

The Jerusalem Post
24 May ’09

The economy: look to the future

Netanyahu paid heavily to pass a budget in time; his “partners”’ bargaining tactics, bordering on blackmail, reflect poorly on our politics.

The Jerusalem Post
4 May ’09

Reform: prospects and pitfalls

Binyamin Netanyahu’s recent economic plan has great promise but faces obstacles—such as the media and the Histadrut—that may undermine its success.

The Jerusalem Post
11 Apr ’09

Big government? Yes, but there’s a reason

Is Binyamin Netanyahu’s government too big? Yes. So why would Netanyahu create such an unwieldy beast?

The Jerusalem Post
30 Mar ’09

To bail or not to bail

Should the government bail out those of our tycoons who cannot redeem NIS 100 billion worth of bonds?

The Wall Street Journal
12 Mar ’09

Mideast peace can start with economic growth

Billions of dollars in foreign aid to the Palestinians has resulted in war not peace. There’s a better way.

The Jerusalem Post
22 Feb ’09

Warning cries from Herzliya

The government is dysfunctional. The question is why—and how to mend it.

The Jerusalem Post
2 Feb ’09

A lesser economic evil

All government deficit spending is bad. But sometimes deficits are unavoidable. And some deficits are better then others.

The Jerusalem Post
22 Dec ’08

Spinners and cheaters

Why not exploit the crisis to destroy what little freedom Netanyahu’s reforms brought to the economy? Why care if the country will lose its only hope of deliverance from the economic retardation caused by our statist heritage?

The Jerusalem Post
3 Dec ’08

Precipitating the next collapse

Focusing on a putative pension crisis distracts our attention from the real serious crisis that a worldwide recession is bound to create here.

The Jerusalem Post
22 Oct ’08

The panic-mongers’ one-note chorus

The country, the pundits conclude, must return to the good old days of “social democracy.”

The Jerusalem Post
15 Jul ’08

The banks are bamboozling us again

In the name of stability the comptroller has ignored many of the banks’ offenses.

The Jerusalem Post
29 Apr ’08

An Irish-style banana republic

It must be either naiveté or cynicism that allows “Israel 2028” to recommend a reform that will make government a larger and a more efficient instrument for economic growth.

The New York Sun
29 Apr ’08

Israel still doesn’t get economy

Israel’s elites—especially the chattering classes in the press and the academy—are hostile to capitalism because our universities’ social sciences and liberal arts departments are dominated by post-modernist and neo-Marxist professors.

Ideas matter. Hostility to capitalism exacts a great price from the Israeli economy and from its hapless workers.

inFocus
2 Apr ’08

US charity to Israel reconsidered

Jewish institutional efforts must now undergo a period of reform and greater accountability. Some charitable efforts should be privatized. Individuals or groups of donors must take personal responsibility for specific projects, to ensure that funds are dispensed in a responsible and cost effective manner.

The Wall Street Journal
8 Mar ’08

Israel’s no-win strategy

Israeli politicians are preoccupied with political machinations designed to buy support from powerful interest groups by distributing government largesse. This causes not only the factionalization of politics and growing corruption, but consumes time and energy that leadership should use to address life and death issues.

The Jerusalem Post
20 Feb ’08

Dangerous infatuation

Government can no more control powerful economic forces than it can the rise and fall of tides. To effectively fulfill its nightwatchman role—to protect us from internal and external violence and to enforce contracts—government must be kept limited.

The Jerusalem Post
22 Jan ’08

What’s ‘public’ about their broadcasting?

Our “public channel,” funded by a compulsive tax, does not need to be pluralistic or even-handed.

Like other public institutions that lack well-defined ownership, Channel 1 has consequently been taken over by bureaucrats and by undemocratic workers’ unions.

The Jerusalem Post
21 Nov ’07

A year without Milton Friedman

This man did more good for humanity than any other.

The Jerusalem Post
17 Oct ’07

Getting beyond the teachers’ strike

As long as education remains a government monopoly, it is bound to function like all other government monopolies, where union bosses fill the vacuum that lack of defined ownership creates, and monopoly power allows them to blackmail the public.

The Jerusalem Post
19 Sep ’07

A healthy dose of skepticism

In the wake of the Second Lebanon War, there is hope that the phenomenal performance of the economy will finally make Israelis realize the crucial role it plays in their lives.

The Jerusalem Post
14 Aug ’07

How to grow Israeli hi-tech

At the recent Merage Foundation conference to help Israel’s hi-tech sector grow, calls were heard for more government “direction”. This despite sixty years of massive government intervention and “development efforts” that have led mostly to massive failures and waste.