July 18, 2011 Dylan Ratigan

Mohamed El-Erian Exclusive: The Real Debt Deal

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Is capital intended to be invested in innovation and development to solve problems, or will it continue to be used merely as a speculative device in the casino of the U.S. economy?

To get answers, we recently spoke with Mohamed El-Erian.  He is the Chief Executive Officer at Pacific Investment Management Corporation (PIMCO), which is responsible for over $1.2 trillion in financial assets, with holdings ranging from America’s mortgages to some of our own government’s debt. El-Erian oversees PIMCO’s investment policies and strategies, and is a lead portfolio manager focusing on global tactical asset allocation strategies.

He has been a strong advocate for more aggressive banking reform since the financial crisis.

“By either enabling or encouraging financial engineering, that has taught making people believe that you can make money out of simply circulating bits of paper around the financial system.  Financial engineering is very powerful if it serves the end consumer.  It’s very dangerous if it allows a tremendous amount of leverage within the financial system,” says El-Erian.

Also critical to fixing our economy is to know where, exactly, we are going.  El-Erian compares our current system to the 405 — but one with no rules and no speed limit.

“A well-functioning 405 is the 405 that has very clear rules—it has a speed limit, it has lane discipline … And if you don’t have rail guards, guardrails, then the accident can get really big.  So what happened is the system started out being really well administered, and then people came along and said, “Wow, can we make it even more efficient because we now have faster cars,” we have financial engineering.  So let’s increase the speed limit… we didn’t set clear lane discipline… And then things started going wrong and next thing you know, you have a huge pileup… Now that’s the system that you’re trying to undo.  The easiest way to undo it, which is very costly to society is to say from now on, the speed limit is 10 miles an hour.”

“Remember in the beginning in some of the better economy that had a lot of money, they would build a road going to nowhere, right?  That’s when that road will become a racing track.”

“When a road becomes an end in itself, you encourage all sorts of bad behavior.  We should never lose sight of the road being a means to an end,” says El-Erian.


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