Gene Sperling v El-Erian - What to do on jobs 2

2 Sep 2011 Bloomberg

[What does Washington need to do to help American business?]

(Mohamed El-Erian)
Washington needs to understand urgently that if it doesn't move decisively in a comprehensive manner things will get much worse. Why? Because the dynamics are pushing towards weakening. Also Europe has its own issues.

We need something on:
- Housing
- Labour markets
- Credit
- Infrastructure
- Public finances

We need to see a comprehensive approach. Otherwise it will be too little too late.

[Mohamed used the word scary. Traders did say money managers are scared. Not because of the headline, because of the lack of action or the perception of the lack of action]

[It's Mike. A lot of people are talking about the Fed stepping in on September 21st. What can lowering interest rates do by itself? Is there some way the Fed can act to remove the blockages in the transmission mechanisms? Is it time to rev up Milton Friedman's helicopter somehow? {This is absolutely the critical issue...........}]

(Mohamed El-Erian)
Is the Fed effective? Does it have the right policy instruments? No. It can only provide another bridge for the other agencies [!]. It can try to extend the maturity of its balance sheet, it can try to expand the size of its balance sheet, or it can expand the instruments it buys. But at the end of the day the Fed is a bridge and if the others don't act it is a bridge to nowhere [Amazing].

If the Fed acts alone commodity prices will go up hurting the economy.

[Is housing the most critical thing?]

(Mohamed El-Erian)
Yes Housing is critical.
It's the same thing in Europe as well! It's news out of Greece and Italy. It's adding to concerns out there.

[What is the risk to bonds? What about the possibility of putting your money in the bond market and getting negative returns?]

(Mohamed El-Erian)
We say there is a time when you worry about a return on your capital and when you worry about the return of your capital. If your money is in cash, stay there. If you're overexposed to equity markets or risk markets, take down that exposure a little bit. You will have other better opportunities. A lot depends on your starting position.

[On the probability of recession]

(Mohamed El-Erian)
I had a probability of one-third and a half. This now increases those numbers. The downside risk is increasing. Now there is even more attention to what Obama says on Thursday. It's a critical speech.

[Is there a new new normal? Is your 2% number for potential US growth too high?]

(Mohamed El-Erian)
It is a new normal minus. There is significant downside risk. We have delayed so much the policy response so much that even the new normal looks a little too optimistic [Amazing]

[On Gene Sperling]

(Mohamed El-Erian)
It's kind of hard because I didn't hear what he had to say. Whatever they come up with has to pass Congress.

{Laughter}


What Mohamed El-Erian is saying is that the Fed needs to co-operate with the political circle in Washington. Only then will there be a chance for the combined policy of stimulus -- monetary as well as fiscal -- to unblock the transmission mechanisms and get credit and growth finally to flow through the economy again. It's a very nice way of putting it but almost impossible to achieve in reality particularly when you throw in the global nature of the crisis. I think El-Erian realizes it and relishes talking about it on camera.

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