The outcome was inevitable. The only surprise about the bombs on Wednesday was that they were so long coming. For months Shin Bet, the Israeli internal security force, predicted violence. But Mr Netanyahu seemed to feel that by starting to build a settlement in Jerusalem at Abu Ghneim, called Har Homa by Israel, he had called Mr Arafat's bluff.
The price of his miscalculation was paid by traders and shoppers killed and maimed in Mahane Yehuda market. Mr Netanyahu always said he viewed such attacks as terrorism, which can be switched on and off by Mr Arafat. But all that is needed for a suicide bomb attack are explosives (obtained from old landmines), a bag of nails and a Palestinian willing to die in order to kill Israelis. Mr Netanyahu has ensured that such Palestinians are in plentiful supply.
The reason for the violence is obvious to half the Israeli population, all Palestinians and most foreign governments. The surprise is that Mr Netanyahu does not see it himself; perhaps he does. One theory is that he is at heart an ideologue who wants to reverse the Oslo accords. By blocking implementation he knows there will be violent Palestinian reaction, which would allow him to reoccupy Palestinian enclaves.
A simpler explanation is that he thinks he can have his cake and eat it. By putting maximum pressure on Mr Arafat and the Palestinians he can force them to accept a Carthaginian peace, in which there will be no Palestinian state but a strange entity whose powers Mr Netanyahu once compared to those of Andorra. But this Palestinian Andorra will somehow have a ferocious security force capable of rounding up all potential suicide bombers.
It has not happened, nor is it likely to. Mr Arafat is dictatorial but he does not act in a vacuum. The West Bank and Gaza Palestinians are among the most politically aware people in the world: no Palestinian political leader could round up thousands of militants, which means imprisonment without trial and torture, without a measure of public support.
The key to Mr Netanyahu's policy is that not only does he refuse to recognise the Palestinian right to self-determination, but that he does not see them as human beings who behave much like Israelis would in similar circumstances.
His books and speeches display a colonial mentality, full of ethnic stereotypes. His explanations of how Palestinians will come to heel, if dealt with sternly, sound like excerpts from Kipling or John Buchan. The Oslo accords, agreed by Israel and the Palestinians in 1993, were not the result of the milk of human kindness suddenly flowing through the Middle East: the negotiators recognised a certain balance of power, much in favour of Israel, but one in which the Palestinians were not wholly impotent.
Mr Netanyahu does not see it that way. For him Yitzhak Rabin, the assassinated prime minister, gave away far more than was necessary. To be fair, it is a view widely shared by the Israeli electorate. Often forgotten is the fact that in May last year they gave a large majority to parties effectively opposed to Oslo; in other words, the maximum they would offer was far less than the minimum the Palestinians would accept.
It is this which makes the situation so lethal. Mr Netanyahu is a man of great ingenuity, but not of great political intelligence. He has little idea of how Palestinian politics work and probably feels he does not have to. He is much better informed about the US and appears to calculate that Washington may put little pressure on him. This has proved true in recent months. But Mr Netanyahu won the election by promising peace and security - and the bombs in Mahane Yehuda shows he can deliver neither.