MK Moshe Gafni's bill to freeze mortgage interest is a dangerous step for the economy and society, and it mainly hurts the weakest strata, those that Gafni actually claims to help.
Let's start with the big picture: after two decades of price stability, inflation is back.
In much of the world it has reached around ten percent - what used to cost $10 in the US now costs $11 - and salaries are not rising at the same rate. Inflation creates a dizzying cost of living, and it degenerates people into poverty. The shopping basket shrinks, and this especially hits the weakest, most Their increasingly expensive basket is basic products. Inflation also affects businesses, the rising prices of inputs. If businesses fail to meet the prices - they close, and then unemployment also occurs.
Failure to address the inflation problem may lead to years of recession, a huge loss of welfare and continued poverty.
Countries have one major tool to fight inflation, and that is interest.
This tool is so important that countries have decided to entrust it to a completely independent body called a central bank in Israel, called the Bank of Israel.
With the exception of the most dictatorial countries, countries understand that price stability is too important to be entrusted to politicians eager to print money.
How does the method work?
Broadly speaking, as soon as a central bank detects a price increase, i.e. inflation, it raises the interest rate for the banks, and they in turn raise the interest rates for their customers (businesses and private individuals).
The increase in the interest rate decreases the demand, because the money itself is more expensive, and the decrease in the demand lowers the prices and stabilizes them.
Since the outbreak of inflation in the world, this is what the central banks have been doing.
Without them - inflation would have been much higher, the damage to the world's economies would have been more severe, and their citizens would have suffered much more.
When Gafni wants to subsidize interest rates, he hurts the Bank of Israel's efforts to curb inflation.
A public shekel that will go to subsidize interest will push a private shekel to be offered for consumption, which will fuel demand and inflation, which as mentioned - hurts the weakest the most.
If the Bank of Israel's tool is not efficient enough, it will have to put more pressure on the gas and raise the interest rate even more, which could lead to a dangerous spiral.
If that's not enough, the interest rate subsidy will have a negative impact on the housing market, even if we ignore the macro effects.
Too low interest rates are fuel for the housing fire.
If a mortgage is subsidized by NIS 500 per month, this money will be divided between the sellers and the buyers.
Sellers who know that buyers have more money in the mortgage - prices will rise, and buyers will be tempted to take larger mortgages because the interest rate is subsidized.
Owners of existing mortgages will try to refinance and upgrade their apartments.
Very few sellers and buyers of apartments during the subsidy period will apparently benefit, but in the end they too will receive what is called in the language of economists "a cake in the face" - because in the end the interest rates will rise or the prices will rise or both, and the buyers of the subsidized apartments may discover that they cannot meet the payments at all.
Also, it is very important to understand that the other side of a subsidy is taxation.
Every shekel that will be used to fuel the housing market, is a shekel that should come from the taxpayers.
These are non-subsidized mortgage payers, young and poor people who do not own an apartment, pensioners, and workers.
Anyone who doesn't warm to the money section of the housing market should freeze to the side.
Subsidizing mortgages also means more VAT, more income tax, and for what? To fuel the market.
And there is, of course, the minor issue of trust.
Apart from fueling inflation and the housing market, harming the poor and putting home buyers at risk, subsidizing interest rates also damages confidence in the country's economic system.
If you fail to stabilize inflation, if banks give out risky mortgages because the interest rate is low, if buyers take credit that they cannot afford - a crisis of confidence is created, and economic confidence is something that is difficult to impossible to restore.
Ask Argentina.
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