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According to Wikipedia dedicated article, Kibbutz crisis was:

an acute economic crisis many of the kibbutzim in Israel experienced during the 1980s and that many still experience today

However, this kind of crisis was far from being new:

[...] It was preceded by many crises, which were followed by many debts settlements as well. The first debt settlement took place in 1924 and since then, debt settlements have been carried out about once every decade and a half

Causes seems to be related to both banks and kibbutz members behavior and include investments made without economic justification, speculative investments, reliance on the government to cover the kibbutzim debt and depriving debt calculation.

Question: Why did Israel state chose to support kibbutzim using the banks and not subsidies or other types of support that do not involve standard financing?

It is almost a century since the first Kibbutz crisis (1924) so there was (or is, it is not clear for me if Kibbutz debts were irreversibly settled) a lot of time to understand that financial support was not provided in a sustainable way.

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Short answer: Because the system is different than the original kibbutzim.

mid length answer :

  1. Better institution and regulation help impose professionalism and eliminate abuse on favoritism (by bribes, etc)

  2. Only selected bank are allowed to involve to conduct the loan scheme. Because "profit chasing" investment bank, tends to speculate returns than conduct the loan in profession ways. That's why you see a lot of speculative bank collapse but rarely see conservative agriculture bank close shop.

  3. Balance and watchdog between banks and subsidies money. Subsidies always eventually lead to favoritism and corruption. Allow the bank to take care of everything will cause the banks withhold the funding for its own gains. So the system in place is not blatantly one way, but a system to watch each other: just rotate the government auditors that watch over the subsidies fund from time to time, to prevent cronyism build up.

In fact, Kibbutz is not special. Any local agriculture society with enough literate worker, it will lead to a collective financial system. However, in the old day, such system needs a strong governance cultures, such as tradition and morals teaching. In modern day, a watchdog and professionalism must be in place.

Honestly, kibbutz crisis is nothing to shout about, as in agriculture society, there is always some collateral to fall back(tools, machinery, output). This is a huge contrast compared to so called "financial derivatives" that no different than Ponzi scheme, the investor/bankers get nothing when the scheme collapsed.

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It turns out that they did, at least according to the article you've linked to:

in addition to receiving credit from the banks the kibbutzim also received additional credit from kibbutz movement funds and from regional and national shopping organisations.

The article doesn't mention how these sources of funding compared to that of received from banks, but they're likely to have been relatively substantial to be given a mention in the article; moreover, it doesn't explain what these sources of findings actually are, perhaps someone better informed may fill in these particular blanks.

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