The main issue is paranoia.
Israelis are paranoid after fighting three wars and being subject to terror for so many years and are worried about their neighbours aim to destroy them as a people and culture.
Palestinians are paranoid since they have been occupied and humiliated for so many years and see everything the Jews doing as aimed to destroy them as a people and culture.
Result is none trusts anyone. Since mutual trust is the foundation of peace and democracy things look pretty grim.
Not to mention all the free ammunition that history bringsto the conflict. Its got everything: Terrorism, wars, nazis, holocaust, dollar and arms aid, strongarm diplomacy, freedom struggles, nuclear threats, cold war politics, antisemitism, poverty, religious extremism etc etc etc plus of course cultural influences from all the people who has moved in, huddled together in an area the size of my backyard.
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For instance if both US parties agreed to not back Israel what would the Jewish bankers do, go back to live in Russia? As the world get's more globalised the options of these people lessen. They will have to stay where the money is. With the Arabs realising their power it only takes a phone call from the Saudis to say goodbye to Israel.
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Quite radical but interesting thought.