by John M. Curtis
(310) 204-8700

Copyright April 6, 2015
All Rights Reserved.

                Former CEO and chief investment officer of Newport-based Pimco’s $1.7 trillion bond fund 56-year-old Mohamed El-Erian admitted in an interview to the Orange County Register that he’s all in cash.  El-Erian’s admission was reminiscent of former Federal Reserve Board Chairman Alan Greenspan who once admitted in 1998 he didn’t invest in the U.S. stock market.  Before leaving Pimco in 2013, Bloomberg reported that El-Erian received a $230 million bonus, despite complaining about a “wealth disparity” he helped to create.  Complaining recently about the Federal Reserve Board—or central banks around the globe—El-Erian expressed concerns about inflated asset prices, created because of artificially low interest rates.  Without mentioning names in the 2007-08 economic collapse or “Great Recession,” El-Erian pointed fingers at former Fed Chariman Ben S. Bernanke.

             Bernanke responded with every tool at his disposal in 2007 to prevent the U.S. from plunging into a second Great Depression.  Greenspan called the 2007 financial collapse another “financial panic,” occurring about once in-a-100 years in U.S. history where the nation’s biggest banks run out of cash.  Working with Bernanke in 2007, former President George W. Bush’s Treasury Secretary Henry Paulson launched as series of trillion dollar bailouts to re-supply banks with cash needed to prevent another run-on- -the bank.   Now working on a book about the Federal Reserve, “The Only Game in Town:  The Rise and Possible Fall of Modern Central Banking and What It Means for You, El-Erian blames Bernanke for the stagnant economy and “wealth disparity” that leaves Wall Street inflated without fundamentals.  Worth over $2.3 billion, El-Erian should be thanking Bernanke for making him rich.

             After complaining about “life-balance” issues, El-Erian now makes his 11-year-old daughter breakfast and drives her to school in Laguna Beach, Calif.  Once working a Pimco’s posh offices in Newport Beach, El-Erian spends his retirement years as consultant to Pimco’s German parent company Allianz SE.  “I am privileged to decide what I really want to do,” said El-Erian.  “What I really want to do is be exposed to various ideas.  Nothing incentivizes you more than when you have to write,” referring to his upcoming book.  El-Erian’s argument about today’s artificially low interest rates inflating Wall Street without trickling down to Main Street sounds superficial.  Speaking on income inequality, El-Erian’s urges a change in fiscal policy, agreeing with President Barack Obama’s attempts to raise tax rates on the wealthy, including bumping up estate and capital gain taxes.

             Admitting “the world of finance I’m interested in does pay off,” El-Erian now has the luxury to write books criticizing the Fed because he’s now in the billionaire class.  “Income inequality has risen so much that consumption as a whole is undermined. That’s because rich people have a much lower propensity to consumer than poor people  . . “ said El-Erian, making no sense.  Poor people or middle class folks salaries haven’t kept pace with the cost-of-living, leaving them less leverage than in the past to contribute to the consumer economy.  “But it is the rich people that have captured all the income growth for the last seven years,” said El-Erian, not talking about the country’s lack of good-paying jobs.  As unemployment dropped to its current 5.5%, the jobs created are too low paying to give wage earners enough cash to add to the country’s stagnant Gross Domestic Product.

             With Republicans controlling Congress—and the budget—the country hasn’t added the good-paying government jobs at the same rate as in the past.  When reducing government payrolls and only adding private sector jobs, they pay lower wages and benefits, adding to the wealth disparity.  While adding low-paying private sector jobs drops the unemployment rate, it doesn’t add to the nation’s GDP.  Poor paying jobs don’t give employees enough cash to spend robustly enough into the consumer economy.  El-Erian insists the wealthy don’t spend as much of their cash into the consumer economy.  If that were the case, high-end companies selling luxury cars, clothing and jewelry and luxury businesses, like restaurants, country clubs and exotic travel, wouldn’t have prospered during the recession.  El-Erian recommends a change in tax policy, rather than creating more government jobs.

             Pointing fingers at central bankers for causing today’s economic sluggishness, El-Erian singles out the wrong folks.  Bernanke and his successor 68-year-old Janet Yellen aren’t to blame for the nation’s anemic growth.  With Congress at loggerheads and with Republicans like House Budget Committee Chairman Rep. Paul Ryan (R-Wis.) refusing to budge on funding new government infrastructure projects, it’s no wonder that GDP remains stagnant.  Until Congress can get on the same page of adding good-paying government jobs, consumers don’t have the cash to spend improving the nation’s GDP.  When you consider the overly-strict lending standards since the 2007 sub-prime meltdown and low rate of home ownership, homeowners don’t have the cash needed to add to the consumer economy.  Raising taxes doesn’t begin to deal low paying private sector jobs or poor rate of homeownership.

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