There is a basis to the Bible story of historical truth, and yes, some Jews (but never all) have at certain times held a more literal interpretation of the stories in Torah. But the stories have never been universally held as totally literal, at any time, despite the claims you sometimes read in what is generally Christian literature. Comparing the Mishnah and other non-Biblical religious sources, Jewish historical identity is far more fluid than what is understood by outsiders like the Watchtower society.
But why all these problems in Israel today? There isn't an easy answer, and oddly enough, it isn't really a religion problem, not exactly. It is, however, a Zionist problem. And the Shoah (Holocaust) just made it worse.
Since the Jews were banished from their land in 135 C.E. by the Romans, the Jews have been without a homeland. In the 1890s a movement called "Zionism" came to the fore. It is a secular movement that strives for the return of all Jewish people to their homeland, regardless if they are religious or not. Zionism includes a belief in the re-establishment of national Jewish rule and political control in the Land of Israel from which the Jews were removed by the Romans in 135.
The struggle you see today is part of the displacement arguments that are created when you move one people out of land to give (or return) to the (alleged) original peoples. Zionists believe the Jews have a historical claim to the land. Those who were living in the land when Zionism came to birth in the 1890s did not, of course, agree.
When the Shoah occurred and ended, no one could have predicted the outcome. With virtually no army, no money, no political control, and having suffered through one of the most horrendous genocide machines ever imagined in world history, the Jews survived. Not only did they survive, but all their enemies were crushed. Again without army, political power, or control, the Jews literally walked over the bodies of their now dead enemies, the nations of which were literally dismantled and shamed, one of which suffered the first and only nuclear attacks in history, and the Jews were given their land back by the United Nations to which they returned.
Zionism was now seen as necessary, not only by the Jews, but by nations of the UN. In order to keep something like the Shoah from ever happening again, the Jews, like any other people, were believed to deserve to develop a state in order to raise a national army. Because we have a historical claim to Israel, and because it had been under the control of Britain at the time, the nations could not argue against the Zionist arguments. Many of them had failed to listen when we claimed the Shoah was happening, and now they weren't going to be deaf to such cries any longer.
So Britain moved out and the Jews moved in. Those who were already in the land, of course, did not like it. But they weren't too pleased with British and UN rule before either. They had a claim to the land too, of course. They had eventually settled over generations of time since the Jewish Diaspora of 135, and had therefore been in the land for centuries. Was it theirs? Was it the Jews'?
Upon returning to the land, the Catholic Church led a movement throughout Christianity to study how the Shoah could have been possible in the first place. It has started in Christian nations, and the questions raised seemed weighty. The answer was a failure on the part of all Christendom, and the response was a formal dialogue between Judaism as a religion and Christianity on the other side, with the Catholic Church taking the lead. The document Nostre Aetate would be the first in a series of changes in Christianity that currently has theologians on the verge of claiming that the return of the Jews to Israel is the fulfillment of prophecy.
While only small groups, mostly Fundamentalist Christians, have made this their official doctrine, the events tied to what next happened, namely the Six-Day War in 1967 in which Israel recaptured Jerusalem, turned Christianity and the secular war on its head. The former residents of Palestine suddenly lost all control to the land of Israel (Jerusalem was assigned as a neutral zone up until them). Christianity as well as the nations became extra cautious. Some began asking if this was all just secular history unfolding or if this was prophecy being fulfilled? From victims of the Holocaust to recapturing their state capital and their holiest of sites in less than a generation, the world of secular nationalism and religion had suddenly mixed. Nobody since then has wanted to get too involved with the the fight on the ground level lest, just in case, the religious writings of a tiny, virtually-nothing nomad nation prove true and there is this God watching over them.
The events made it harder for Zionism, however, as the Orthodox Jews who have a literalist view of Judaism began to make claims in favor of the religious interpretation of events. This has sparked an unfortunate behavior, not unlike that of other religious extremists which is fomenting the violence between the Jews who live there and the Palestinians who have been displaced. Add to this, the Palestinians have their own religious views which give them divine claim to the land, and you are left with a paradox, indeed.
Surprisingly, most Jews don't agree with the Orthodox extremists in Israel. The recent government leaders have seemed to pander to them, however, and the Post-denomination, post-rabbi movements in Judaism around the world has been the response. Many Jews believe we should live in peace, and help settle all who have a claim to the land of Israel/Palestine. But with the way extremists have been interpreting events, and the fact that it is hard to imagine even for a religious Jew like myself how events written by a minority of people in what was probably one of the smallest and insignificant religions in history could seem to have told the future.
I have a wait and see attitude, like many Jews. Let God do what God is going to do, if God is doing any of this at all. Don't start attributing things to God, in God's name, that you have not been assigned by Heaven to claim are so.
But alas, I am not the one with political control. And there are now extremists and violent hatred on both sides, each calling the other the Devil. Even if all the Jews stopped demonizing the Palestinians, could we get their extremists to stop doing the same?
