'We've Just Lived Through a Financial Accident:' Mohamed El-Erian
“However, it is why we are here that’s important,” he continued. “We’re here basically because we had a prolonged period of overly loose monetary policy. When it came to adjusting monetary policy, the Fed did not act fast enough. And then it had to hit on the brakes. And you’ve heard me say over and over again, when you hit the brakes you risk both economic and financial accidents. And we’ve just lived through a financial accident.”
He stressed that “depositors should not worry. Your deposits are fine and there is no need to be trying to move your deposits. I know there’s an inclination to do so because, after all, it’s better to be safe than sorry. But honestly, there is no risk to your deposits anymore.”
‘Almost Impossible’ to Backtrack on Unlimited Deposit Guarantees
Now that the government went beyond the standard $250,000 FDIC deposit insurance amount for SVP and Signature Bank customers, “it is almost impossible now to go back on unlimited deposit guarantees,” El-Erian said.
“However, people are revisiting rightly the value of bank stocks and bank bonds, and then markets have basically voted already that the Fed will now back away from its inflation fight, and that’s not good for the long term,” he added.
If El-Erian was part of the Fed panel deciding on interest rates at its meeting later this month, “I would raise 25 basis points,” he said. “I would make it very clear that I have a set of tools to deal both with inflation and financial security. And I will not confuse those tools because if I do so — and that is the lesson of the last few years — every time we do so, we fall in the muddled middle and we are worse off.”
“We have an inflation problem, and the longer we allow it to get embedded into the system, the greater the cost to society,” he said. “We may end up in stagflation, which would be miserable, not just for markets, [but] most importantly, it would be miserable for the Americans.”
Mohamed El-Erian. (Photo: Wei Leng Tay/Bloomberg)
