Is leverage a problem for the world economy? Is the global "savings glut" at the root of the current credit crisis?

In our view, the answer is no. Saving is good - provided it is well directed - and leverage per se is not a hindrance to economic growth. If capital can be efficiently allocated to the most productive sectors in the global economy, a high savings rate can enable a high investment rate. In turn, a high investment rate can allow for a higher rate of economic growth in the long run. In the five years preceding the current crisis, however, excessive leverage and non-productive investment helped fuel both a credit bubble and an economic boom, with global GDP expanding at the fastest pace since the 1960s. The main question is not whether the world economy was running on too much leverage, but whether the financial sector was able to allocate global capital efficiently. In many countries, misguided government policies favoured investment in housing from the mid-1990s. Meanwhile four of the world's top five largest oil and gas reserves holders, in effect, shut their doors to outside investment from 2000. Financial institutions reacted by channelling excess savings from fast-growing emerging economies into the real estate sector in OECD countries. Attracted by the perceived safety of property markets, capital flows avoided capacity investments in volatile sectors such as commodities. In other words, markets failed and too much money went into real estate, too little into energy. The spike in energy and food prices that followed - primarily the result of under-investment in productive energy capacity and rapid demand growth - crippled fast-growing emerging markets. The financial turmoil is thus coming from a gross global misallocation of capital, not excess indebtedness.