Mohamed El-Erian, CEO of the world's largest bond fund, Pacific Investment Management Company LLC (a/k/a "PIMCO"), whom many of you reading my diaries may recall is the person to whom I attributed the term, "the new normal" (See: my diary on 5/4/09, "
We've Got Your 'New Normal,' Right Here!" And, Mohamed El-Erian's first use of the term, on 5/26/09, here: "
New Normal of 2% GDP Growth Coincides With Bullish Biggs"), came out with a major milestone of a statement in Monday's Financial Times, headlined: "
Return of the old ways of thinking threatens recovery."
In what many may perceive as being a significant rebuff to President Obama's top economics advisor, Larry Summers, and others, El-Erian says we must turn our focus
away from "temporary growth impulses"..."to the permanent ones needed to sustain above-trend growth in 2010 and beyond." El-Erian:
As such, the global economy may find it tough to attain Larry Summers' "escape velocity" - sufficiently high and sustained growth to propel the US (and the rest of the world) away from the contractionary drag of further debt reduction, risk aversion and reregulation.
He warns that we must have adequate regulatory reform (El-Erian refers to it as a "robust anchoring framework") and this requires that we turn our backs on our historical reliance upon the quick fix; because that's just a return to past mistakes.
More from El-Erian:
We are at the point of maximum confusion in the multi-year transition of the global economy, markets and policymaking. We have left the global growth regime that was driven primarily by debt-financed consumption in the US, but we have not as yet reached a position of more balanced, albeit anaemic, growth. Those who lack a robust anchoring framework, be they investors or policymakers, risk being misled and backtracking to outdated ways of thinking.
The signs of inappropriate reversion are multiplying. Confusing temporary factors for sustainable ones, a growing number of analysts have extended the ongoing stimulus/inventory bounce to a V-like recovery next year and beyond. The momentum for meaningful financial reform is stalling in spite of clear evidence that financial activities have far outpaced the regulatory infrastructure. And some banks are returning to the bad habits that almost destroyed them.
This reversion is intimately linked to the inadequacy of the anchoring analytical frameworks. Appropriate frameworks provide important protection against the short-termism that can contaminate markets and policymaking...
--SNIP--
...Today's lack of appropriate anchoring frameworks appears to be exacerbating short-termism. The issue goes well beyond the still-limited appreciation of the multi-year realignment of the global economy, which is gaining momentum. It also relates to tendencies well-documented by behavioural economists - such as framing the problem wrongly and refusing to question past approaches.
Citing comments made last month by Bank of England governor Mervyn King, Mr. El-Erian pointed to four "examples" of "levels" (i.e.: goals) that we should collectively seek to attain, as opposed to the outmoded, but-still-too-frequently-utilized concept of "growth." Those four examples are:
1.) consumer indebtedness must be pared down;
2.) banks' balance sheets must reflect reality; currently, they're "too geared for the comfort of regulators or their own managers;" El-Erian points to commercial real estate and residential housing as still in need of significant refinancing; but, this must occur with allowances being made for consumers to work down their debt (see #1, above);
3.) unemployment is much higher than anticipated, and--as El-Erian has noted in the past--it will be "unusually protracted;"
...It will take years for US unemployment to return to its natural rate, even after the natural rate shifted upwards. This will dampen the recovery of consumption and investment, stress social contracts that assume flexible labour markets, and endanger political support for essential structural reforms...
4.) the public debt of the U.S. must be contained; El-Erian outright states, "It could...erode the medium-term ability of the US to fund cheaply its large deficits by undermining both the global standing of the dollar as world reserve currency and the attractiveness of US financial markets."
Collectively, IMHO, I believe these four "examples," cited above, represent a growing chorus of not-so-veiled, global admonitions aimed directly at the leaders of the U.S. and U.K. economies (and, to a lesser extent, perhaps, to the entire EU). More specifically, El-Erian's admonishments--while not directly addressed towards the U.S.--pertain to the growing global perception that this country's continued reliance upon seeking the quick buck, in combination with the appearance of our government's rush to return to even more grossly inadequate regulatory oversight (than existed prior to the onset of the Great Recession in December 2007) is simply unacceptable to the world, at-large.
# # #
See the following links for noted, third-party opinion that confirms that we're, indeed, returning to a regulatory environment that's actually worse than the one which precipitated the onset of the Great Recession in late 2007:
Liam Halligan at the London Telegraph, 9/26/09: "No reform, just a cosmetic patch for a discredited, flawed regime."
Damian Paletta and Kara Scannell, Wall Street Journal, 9/24/09: "Democrats Soften Financial Bill."
Satyajit Das, Naked Capitalism, 9/24/09: "Guest Post: Satyajit Das on Dr. Jekyll and Mr. Hyde Finance."
Nobel Prize-winner Joe Stiglitz, AOL Daily Finance Blog, 9/17/09: "Nobel winner Joseph Stiglitz predicts recession's end: not now, but 2012."
Edward Harrison, CreditWritedowns.com/NakedCapitalism.com, 9/16/09: "Financial Reform: Not happening but the need is clear."
Gretchen Morgenson, New York Times, 9/13/09: "But Who Is Watching Regulators?"
Alan S. Blinder, New York Times, 9/5/09: "The Wait For Financial Reform."
Yves Smith, NakedCapitalism.com, 9/2/09: "The Real Regulatory Revolving Door."
Jenny Anderson, New York Times, 8/6/09: "Despite Bailouts, Business as Usual at Goldman"
And...my DKos diary on 9/14/09: "Keep Doing What We're Doing...Keep Getting What We've Got."