El-Erian Says Geithner Shares an ’A’ With Bernanke for Effort
Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., gives Timothy Geithner and Ben S. Bernanke an “A” for their efforts to revive credit markets.
Geithner, the U.S. Treasury secretary, and Bernanke, the Federal Reserve chairman, deserve just a “B” for results because “it’s very difficult to get it right,” El-Erian, 50, said in an interview from Pimco’s headquarters in Newport Beach, California. “They’ve been imaginative, they’ve been bold, they’ve been willing to take risks. On outcome it’s a ‘B.’”
The policy makers have taken unprecedented steps over the past year to restore confidence to credit markets. The Federal Reserve doubled its balance sheet and introduced programs to strengthen the market for consumer loans, such as the Term Asset-Backed Securities Loan Facility, or TALF. The Treasury on July 8 started its program to buy as much as $40 billion in devalued assets from financial institutions.
“We’re in a phase of policy experimentation,” El-Erian said. “We’ve never seen this.”
El-Erian compared the predicament of the policy makers to pilots trying to control a plane that’s caught midair in a storm. “Our assumption is that the pilots know what to do,” El-Erian said. If the cockpit door was open, “we would see the pilots banging on the instruments because they’re getting readings they’ve never seen before.”
‘New Normal’
Pimco, an early advocate of the U.S. Treasury’s Public- Private Investment Program, in June decided to withdraw its application to participate. This week, the firm cited “uncertainties” in the plan’s design. El-Erian declined to comment on the decision.
El-Erian shares the position of co-chief investment officer at Pimco with founder Bill Gross. El-Erian, a former deputy director of the International Monetary Fund, in May used the phrase “new normal” to describe a world characterized by heightened government regulation, slower growth and rising unemployment.
El-Erian said the bankruptcy of Lehman Brothers Holdings Inc. in September gave the financial markets a “cardiac arrest” that accelerated the credit-market crisis. That week, worried about a breakdown of the banking system, he asked his wife to withdraw as much money from the cash machine as she could personal business cards.
High Unemployment, Slow Growth
“The financial system has normalized, although it is not operating as it should,” El-Erian said. “The economic crisis will be with us for a while.”
El-Erian said that unemployment may peak at between 10.5 percent and 11 percent and will stay above 7 percent for years. U.S. growth rates will slow to 2 percent or less over the next five years, he said.
Pimco, a unit of German insurer Allianz AG, manages $756 billion including the largest U.S. mutual fund, the $161 billion Pimco Total Return Bond Fund.
Pimco has provided advice over the past year to the U.S. government on policies to help financial markets recover. The firm as early as 2005 shunned subprime mortgage-related assets in its funds, citing a looming crisis in the market.
El-Erian said the “new normal” means that investors must reassess how much money they can afford to lose. Investors also need to look outside the U.S. and put more money into international investments.
‘Regime Shift’
“We’re coming from a world in which the U.S. was the engine of growth,” El-Erian said. “There will be a complete regime shift in terms of the investment paradigm.”
El-Erian has been at Pimco since 2008, when he rejoined the company after a stint as president and CEO of Harvard Management Co., which runs the endowment of the Cambridge, Massachusetts school, the world’s largest university fund. El-Erian was there from February 2006 to December 2007.
El-Erian first joined Pimco in 1999, and was a senior member of its portfolio management and investment strategy group. He led Pimco’s Emerging Markets Bond Fund to an annualized gain of 19 percent in the five years ending 2005. Earlier, he had served at the IMF for 15 years through 1997.
El-Erian is the son of an Egyptian diplomat and is fluent in Arabic, English and French. He is the author of “When Markets Collide: Investment Strategies for the Age of the Global Economy,” published last year by McGraw-Hill. The book deals with the shifting relationships between international markets.