McCombs TODAY

McCombs Dean Tom Gilligan shared his thoughts on the economic meltdown earlier this month at the Men’s Breakfast Club at the Lakeway Activity Center. The Lake Travis View reported on the talk.

“In a very significant way, today’s financial crisis is directly connected to the enormous savings of countries in Asia and the Middle East during the mid-to-late 1990s,” Gilligan said. “As most of you recall, the rising price of oil prompted large cash reserves in Russia, Nigeria, Venezuela and the nations in the Middle East.

“Their productive economies, along with their strong regimes where they can actually think about getting their investments back, contracted a good portion of these reserves, as foreign investors purchased low risk assets [in the U.S.], such as Treasury Bonds, government-sponsored debt such as Fannie Mae and Freddie Mae, as well a riskier assets like mortgage-backed securities.”

Gilligan believes the global savings glut laid the foundation of most of the current economic challenges.

“From 1986-2007, the developing countries of Asia, Eastern Europe and the Middle East went from a combined deficit of $82 billion to a surplus of $762 billion,” Gilligan said. “That turned those nations around from being net-importers to net-exporters of goods and services. Most of these surplus funds found their way back from the developing countries to Europe and the U.S. So a lot of the world accumulated a lot of cash reserves, but didn’t spend them because the didn’t spend the money in their respective countries.”

Instead, that money came back to the U.S. and Europe as investments, which in turn, was spending money on its citizenry in the form of social programs, education and infrastructure.

Read the full article here.