A few days ago, the Huffington Post sent me a press alert saying that Mohammed el-Erian had written a blog post warning readers to “listen to Occupy Wall Street.” That caught my eye.
For those who don’t know el-Erian, he’s a co-CEO of PIMCO, one of the world’s largest — and wealthiest — bond trading operations, with more than $1 trillion under management. Despite being based in Southern California, PIMCO and its leaders are titans in finance. So I called el-Erian to ask him what exactly he saw in this movement that is, in large part, dedicated to combating his industry.
Ezra Klein: You’ve done quite well in finance. You have, presumably, a lot of friends in finance. But insofar as Occupy Wall Street has an agenda, it’s to shrink the power, size and compensation of the finance sector. So explain what in their message appeals to you.
Mohammed el-Erian: My reaction was colored by two views I’ve expressed already: One has to do with what has happened to finance. In the mid-2000s, the thinking about finance evolved to believing it was a standalone phase in capitalist progression. Society -- in particular the U.K. and U.S. -- bought into the notion that the path of development was agriculture to industry to services to finance. And that explains a lot in terms of people’s mindset. The name of the industry went from “the financial services” industry to “the finance industry.” It lost sight of the fact that it services the real economy. You cannot simply exchange paper.
The other catalyst to my reaction was I was at an airport early, and I saw someone on the TV say the movement was inconsequential and illegitimate. That’s not right. This reflects something that has become more important around the world, which is the desire for greater justice and fairness,.In the U.S., the bailing out of the financial sector was sold on the basis that it would allow growth and job creation to resume, and that has not happened. So the rationale for socializing those losses hasn’t played out.
We have seen these things before, and they go in one of two directions. Either they coalesce around something that begins to influence political elites and encourage a midcourse correction. And that would be healthy. I think we do need a midcourse correction to bring down unemployment. But there’s another possibility that the movement doesn’t look forward, gets frustrated and becomes violent. That would be bad for everyone. So a contributor to increasing the possibility of the first outcome and reducing the possibility of the second outcome is understanding why this movement happened.
Klein: What’s the midcourse correction that could ease the pressures that led to it?
el-Erian: A lot of what they talk about is a reflection of the five big structural impediments to growth and employment in the U.S. today. We have a housing market that’s not functioning. And housing is really important. It’s the largest component of people’s wealth. We have a labor market that is showing structural unemployment, which is really scary. And remember, the unemployment number is not just 10 percent. If you add in underemployment, it’s more than 16 percent. And add in people who have left the labor force, and it’s 20 percent. So that’s your real unemployment. The third element is credit. We have this ridiculous situation where those who don’t need credit, like big multinationals, can get credit in the capital markets, and small and medium firms, which need credit, can’t get any. Those are the big three.
Add on top of that, we have crumbling infrastructure and we can’t seem to resolve the debate between short-term stimulus and long-term budget reform and you have a whole set of impediments undermining the return of growth. That doesn’t deny the importance of the demand side. Demand is important, but not sufficient.
Klein: What worries me is that ordinary people and policymakers are headed in the opposite directions. I think that for a few years, most folks felt we were going through a bad time but we would bounce back. Policymakers, by contrast, really had their hair on fire and were doing everything they felt able to do in order to prevent another Great Depression. But now ordinary folks feel that we’re caught in this stagnation, that we’re not bouncing back, that this is a new normal, while policymakers are gridlocked and resigned and mostly just waiting for the next election.
el-Erian: In Washington and Berlin and Frankfurt, policymakers are stuck in a cyclical mindset. They believe in mean-reversion. You can wait for the election because, once we get past November 2012, we’ll get back on track. It’s like a rubber band, It’ll snap back. But people get that this is worse than that. They’ve experienced a lot of unthinkables. They don’t think this is cyclical, but structural. Part of that is path dependency: The longer your unemployed, the harder it is to get a job. The less credit you get, the more problematic your business becomes. People are not living in a mean-reverting world. They’re living in a world of path-dependency, and it’s getting worse. So you get the two mindsets clashing.