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We Still Need a Shock and Awe Approach

PIMCO's Mohamed El-Erian says we're still six months behind in terms of global policy response.

Eric Jacobson: There's been a lot of talk about the disappearance, if you will, of aggregate demand globally in the economy. Certainly, a lot of talk about how that is going to be reconciled at some point. Talk about what you think needs to happen in order for us to I don't know how you would want to define it, whether it's stability economically or some semblance of health. What needs to happen in order to get there?

Mohamed El Erian: Priority number one, Eric, at this point is to try to stabilize the system. It sounds simple, but it's complicated because there are four distinct segments all trying to contract at the same time. And they can't all contract at the same time.


If they try to contract, you get these negative feedback loops and this notion that no one can get up without pressing somebody else down in the process. So, you need housing to stabilize. You need finance to stabilize. You need the U. S. consumer to stabilize, and you need the demand in the rest of the world to stabilize. That is why what you need is a shock-and-awe approach at the level both of the U. S. and the rest of the world.

It will come. The irony is that you end up by having policies that would have worked great six months ago. Come six months later, and we're still in the too little too late.

Eric Jacobson: Let me switch gears again, and ask you a more granular question. We're still on the cycle of discussion of stimulus. We've had some stimulus already. There's now starting to be talk about, maybe, more again.

There's obviously I don't know if you want to say politically but out in the U. S. electorate there's a lot of discussion and concerned thought about the question of spending more money at a time when it seems as though spending too much money got us into trouble. We've had conversations about this kind of thing. Maybe, you can frame out your feelings on why that is something that is desirable and needs to be done, even though for a lot of people it may seem counterintuitive.

Mohamed El-Erian: And it does sound counterintuitive. The reason why we're here is because we've had too much debt. So, this notion that let's have another fiscal stimulus package which means more fiscal debt in order to get us out of this problem is counterintuitive. We've also had a number of bailouts, and let's be frank. They really haven't worked.

They've worked at the level of the commercial paper market, but they haven't worked at the level of the system. So, there's naturally a lot of concern that we are simply trying to do more of something that doesn't work. I sympathize with that. Most of us sympathize with that, and as taxpayers we should really care.

The problem is there is no alternative. It's one of these things where fortunately we are in the world of third and fourth and fifth best, and the world of first best isn't attainable today. We have to try and do whatever we can to stabilize the system, and then we've got to fix it.

You know, I go to the doctor every year, and every year he tells me, "Mohamed, you've got to exercise more. Your cholesterol is too high. You've got to be careful what you eat." And I say, "Yes, yes". And the next year I go along, and he says, "Have you done anything?" I say, "No, not quite yet".

We've had structural weaknesses in the economy, and now we have an opportunity to address them, but we cannot address them before we normalize the system.

Eric Jacobson: I think that's a good place to stop. Thank you very much. I really appreciate your time.

Mohamed El-Erian: It's always a pleasure, Eric. Thank you.