By David Palmer

Published: May 3, 2008

As tension builds over the state of the American economy, a professor of economics visiting Marianna Friday offered two pieces of advice.

First, said Dr. Malcolm Gillis, “Don’t panic.”

His second bit of advice was to write to your representatives or senators in Congress and ask them to take a vacation.

“The worst part of this is that this is an election year. “You don’t want Congress to do anything at this time. Tell them to take a vacation and come back after the election,” Gillis said.

Gillis, who graduated from Chipola College in 1960, has enjoyed a long career in higher education. He was at Harvard, Duke University, and finally president of Rice University in Texas. He spoke Thursday night to Chipola’s graduating class and Friday morning to a packed house at the Jackson County Chamber of Commerce’s’ First Friday Power Breakfast.

Gillis noted in his address that the world capital market is quantitatively and qualitatively different from that of 50 years ago.

“Immense quantities of funds move daily across national boundaries. As a result, there is a massive amount of liquidity sloshing around the world, seeking the highest return available,” Gillis said. “The qualitative differences are also striking. Fifty years ago, financial markets were atomized. Share ownership was widely diffused among mostly individuals. Now, share ownership is concentrated in large institutions willing to play rough in markets: government pension funds, corporation pension funds, mutual funds.”

And just how big is the world’s financial system today, including total stocks, bonds and other financial assets?
Gillis said the estimate stands at about $150 trillion.

He also said the daily flow of this money across national borders often reaches $6 trillion.

“The United States is at the epicenter of these flows,” he said. “Last year the U.S. received 85 percent of the net flow from net exporters of capital.”

Gillis noted that the $150 trillion of world financial assets dwarfs the assets in the Federal Reserve’s own portfolio.

“The fed system open market account is less than $1 trillion, and this itself is less than the $1.5 trillion held just by U.S. hedge funds. Global central bank reserves were only $6.4 trillion in 2007,” Gillis said.

He also said financial shocks in one corner of the international capital market are now quickly transmitted to every corner of the world, because of financial markets are so interconnected, and because capital is so mobile.

Gillis called the current situation a recipe for “indigestion.”

In this financial environment, with some lenient periods concerning regulation, large financial institutions have been going belly-up around the world. Gillis also said a possible sharp recession looms over the horizon.

In the midst of all this, Americans are rapidly increasing their credit card debt and home equity debt especially in regions where housing values have fallen most, Gillis said.

“I for one take some comfort in the fact that Ben Bernanke, not Alan Greenspan, is at the helm of the Fed. Greenspan was inattentive to the regulatory aspects of the Fed’s mission. We are paying for this today,” Gillis said.