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  • aretired_1998t aretired_1998t Dec 21, 2012 6:31 PM Flag

    PIMCO's El-Erian: Recession Is Now More Likely

    PIMCO's El-Erian: Recession Is Now More Likely
    By Mohamed El-Erian, CEO & CO-CIO, PIMCO | CNBC – 6 hours ago
    The following CNBC guest blog is from Mohamed El-Erian, the CEO and Co-CIO of PIMCO, which oversees nearly $1.8
    trillion in assets and runs the Pimco Total Return Fund, the largest bond fund in the world.
    Here is a simple way to think about the political calculus of Washington's latest twists and turns.
    And -- unfortunately -- it suggests that economic and market dislocations may be needed to get
    our politicians to cooperate and govern properly.
    A major issue from day one was the extent to which the lack of trust between our political parties
    undermined Washington's ability to govern. Hoping to resolve this problem and thus deliver consensus, party leaders opted in the summer of 2011 for a very big stick:
    threaten the country with a major economic setback as a way to get the rank and file of both parties to cooperate.
    This, of course, was the strategic underpinning of the fiscal cliff: By designing large and blunt spending cuts and tax hikes
    that would automatically go into effect, and thus push the country into a costly recession, political leaders hoped to impose
    compromise among bickering and dithering politicians - particularly among those with very different views of the past,
    present and future.
    The stick succeeded in catalyzing serious negotiations between President Obama and House Speaker Boehner. But the stick
    was not big enough to overcome differences and force a cooperative outcome. And with Republicans facing the bigger risk of
    being blamed by the country for the failure, Speaker Boehner opted for his Plan B.
    Now the situation has taken an even more interesting turn.
    The Speaker's inability Thursday to unite Republicans behind his plan highlights the extent to which mutual trust is also
    seriously lacking WITHIN the political parties - and not just between them. This meaningfully complicates the cooperative
    solution. (Read More: Boehner Abruptly Scraps 'Plan B' Vote in Setback)
    How about the future?
    Let us start with the obvious. In order to avoid a recession that would aggravate the country's unemployment problem and
    reignite concerns about housing and household finances, Democrats and Republicans need quickly to find a way to work
    together. While possible, it is hard to see how this happens endogenously. There are lots of divisions, and at many levels.
    If an internal resolution mechanism is indeed lacking, than cooperation will need to be forced by an outside event. This is
    where economic and market volatility comes in.
    Thursday's collapse of Speaker Boehner's Plan B unfortunately makes it more likely that the fiscal cliff may materialize,
    constituting a blow to a recovering US economy. Absent some last minute messy deal that buys a few weeks at best, that
    would constitute stage one.
    The question about stage two is how much time do political parties then need to find a solution and avoid a bigger economic
    and financial implosion.
    The 2008 experience with TARP - where the market and economic dislocations that followed the initial congressional vote
    rejection quickly forced politicians to cooperate - suggests that there is nothing like visible turmoil to get our bickering
    political parties to come together properly in the national interest.
    Let us hope that the political system responds in a similar fashion in the coming weeks, if not earlier. There is a lot at stake.

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