“The borrower is the servant to the lender” is a well-known verse from Mishle (Proverbs), cited frequently in the Gemara and later rabbinic literature — as often in a moral context as a halachic one.
Although lending — ideally without any charge, let alone formal interest — is strongly encouraged in Jewish thought and practice, borrowing is definitely not. Rather, its financial and moral disadvantages are highlighted, perhaps nowhere more so than in the pasuk quoted above.
This background is important in seeking an explanation for one of the most extraordinary, but least-known and hence rarely mentioned features of the Israeli economy. This is the very low level of consumer credit, both in absolute terms and, especially, by comparison with many Western economies.
The United States has developed into the consumer-driven economy par excellence, with its bias to consumption fueled by the massive growth of consumer credit over recent decades. Other developed economies have trod a parallel path — notably the UK, but also countries as distant and seemingly different as Spain and South Korea.
But not all. Continental European economies, notably Germany, eschewed consumer spending as the main driver of growth, especially if this was based on borrowing to spend. Clearly, the very different structure of the financial system in continental countries vis-à-vis the Anglo-Saxon model influenced this outcome, but is this the ultimate reason — or is the reticence to borrow actually a much deeper cultural trait?
Whatever the answer, the Israeli financial system has conformed to the continental European pattern rather than the Anglo-Saxon one — only more so. Five years ago, the level of consumer debt in Israel was so low, compared to GDP, or in relation to household income, or financial assets, or by any other accepted measure, it made even the sober Germans seem profligate.
But in recent years the area of consumer debt — as mortgages and in other forms, such as credit card debt — has become the primary source of growth for the banking sector, so that the total amount of household debt has risen sharply.
How much? The latest Bank of Israel data show household debt totaling NIS438 billion at the end of 2014. That was an increase of almost 7% over the end-2013 total of NIS410bn, but a longer-term comparison provides much more worrying data.
A useful baseline is end-2008, when the global financial crisis was at its height and also the point of time when interest rates dropped sharply from levels that used to be considered normal, to levels that used to be considered extremely low — although they are today even lower than they were then.
In this six-year period, total household debt, from all sources and for all uses, has risen by 51%, and borrowing from banks by 70%. Mortgage debt — which has been used to fuel the home-buying boom that has driven prices so much higher and created a political crisis — was 80% greater in December 2014 than it was in December 2008 — and credit card debt has soared 114%.
These are certainly very large increases, but the result is not as worrying as the figures make things sound. That’s because the starting point was so low, so that even after a huge jump, the relative level is still low — relative to the overall size of the economy and certainly relative to other countries. Thus, for example, total Israeli household debt is still less than 38% of GDP, whereas in most Western countries it is at least double and in some it is around triple that level.
What is worrying is the trend, because if this continues at the pace of the last few years, then in another few years Israel will also have reached problematic levels. More worrying is the aggressive marketing of debt which is becoming commonplace and which most people have difficulty resisting.
Most worrying of all is that, because interest rates are so very low, debt seems remarkably cheap and not a burden to service. But when interest rates rise one day, even by one or two percentage points, that burden will rapidly become onerous and eventually unsupportable.