Payoff board member Mohamed El-Erian talks with us about his newest book, The Only Game in Town, and the role we all play in the future of the economy.
Payoff board member Mohamed El-Erian’s newest book, The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse, sheds light on the world’s central banks and the decisions we’re all faced with when it comes to preventing another financial crisis.
Why is this such an important subject? The Only Game in Town explains how decisions made by central banks directly impact individuals — that’s you — such as influencing mortgage rates. And if the United States’ recent financial crisis taught us anything, it’s clear that both governments and citizens need to do a better job of seeing the big picture where money is concerned.
Payoff aims to be part of the solution that Mohamed draws attention to in The Only Game in Town by arming people with the tools and insights that lead to increased financial awareness, control over their credit card debt and ultimately, a pathway to being credit card debt-free.
Here Mohamed explains why you should care about the central banks, describes the turning point that faces the country and shares what he believes comes next for all of us.
Payoff: In broad terms, what role do the world’s central banks play in a country’s economy?
Mohamed: Central banks play a key role in the economic and financial welfare of society. Their actions influence inflation, economic growth and the stability of the financial system.
Central banks play a key role in the economic and financial welfare of society.
What do central banks support here in the U.S.?
The Fed’s dual mandate is to deliver maximum employment and stable inflation. In recent years, the central bank has also acquired greater responsibilities for the stability of banks and some other financial institutions.
How did the central banks respond to the financial collapse of 2008?
There have gone through 3 distinct phases since the global financial crisis of 2008 and the Great Recession.
In the specific case of the U.S. Federal Reserve, bold and exceptional measures in 2008 to 2009 averted what would have been a very damaging global economic depression.
In 2010, and having normalized the functioning of the financial system, the Fed pivoted to take on broader responsibilities for delivering comprehensive economic outcomes. It did not do so by choice but by necessity. Most other policymaking entities were sidelined by Congressional dysfunction.
… Bold and exceptional measures … averted what would have been a very damaging global economic depression.
Having relied on unconventional policies for a lot longer than anticipated, the Fed started normalizing its policy stance in 2014. By December 2015, it felt comfortable enough to raise interest rates for the first time in almost 10 years — this as part of a very gradual process.
Now, 8 years later, where does this leave us? Are we in a better or worse position than where we were 10 years ago?
We are better off in that the world avoided a potentially devastating global depression that would have hurt both current and future generations. But the economy is yet to achieve “escape velocity” and proper “liftoff.” As such, economic growth remains below potential, wage growth has been frustratingly sluggish and inequality has worsened considerably.
… The economy is yet to achieve “escape velocity” and proper “liftoff.”
How is each individual affected by policy changes of the banks? Can you give examples of how moves by the banks impact individuals?
The best example has to do with the setting of policy interest rates. Whenever the central bank alters its rates, or when it uses “forward guidance” to signal upcoming policy changes, it has a direct impact on borrowing costs, including mortgage rates. It also influences what depositors are paid on their funds. And it often impacts business sentiment and risk-taking appetite in the financial markets.
Your book describes us at a turning point. What comes next for us and what should we be doing as a country and as individuals?
We are heading toward a “T junction.” The road we are on is going to end within the next 3 years. What comes next is far from pre-destined as it depends on actions that are taken in the months and years ahead.
The road we are on is going to end within the next 3 years.
One road out of the “T” involves higher inclusive growth, a reduction in inequality and genuine financial stability. It is a road born out of a handoff from over-reliance on central banks to a comprehensive policy response.
The other road is a lot less attractive. It would result from the continuation of the current partial and insufficient policy response. It would involve periodic recessions and the return of unsettling financial instability — both of which would fuel political polarization and place increase strains on the social fabric.
Written by Payoff
