PIMCO’s Mohamed El-Erian says that “Only New Thinking Will Save the Global Economy”. El-Erian believes that the situation will get worse before it gets better, saying that we are moving toward a “different destination” and one that results in “more market accidents, disorderly sectoral realignments and additional shifts in policy.” He goes on to say that “we are also in the midst of a prolonged increase in precautionary behavior among entities that have suffered massive wealth destruction and face a multi-year clean-up of assets and businesses. Without further adjustments, there will be an aggravation of the negative feedback loops that have been so detrimental to global welfare.”
El-Erian, whose piece first appeared in The Financial Times, outlines four principles that governments should follow during this crisis:
1 – “intervention should be limited to sectors at the center of the healing process”;
2 – “governments should partner with the private sector, which, in most cases, would involve voluntary co-investments”;
3 – they should discuss “upfront exit mechanisms”;
4 – “they should not let the best be the enemy of the good: crisis management inevitably results in inconsistencies that a subsequent reconciliation and reform effort must address.”
By following these principles, says El-Erian, we can minimize the “cost to human welfare” and maximize the impact of policy action.