Mohamed El-Erian heads the world's largest bond fund. It is worth noting that he took a time out from the bond fund business to rescue the endowment fund at Harvard after Larry Summers almost bankrupted it.
As you read this excerpt from his writing, notice that the Wall Street banks that screwed us in 2009 are at it again.
Also note that how well Ben Bernake's Quantitative Easing Programs have worked.
But the other credit crisis is equally consequential, and receives much less attention, even as it erodes societies’ integrity, productive capabilities, and ability to maintain living standards (particularly for the least fortunate). I know of very few Western countries where small and medium-size companies, as well as middle-income households and those of more limited means, have not experienced a significant decline in their access to credit – not just new financing, but also the ability to roll over old credit lines and loans.
The immediate causes are well known. They range from subdued bank lending to unusually high risk aversion, and from discredited credit vehicles to the withdrawal of some institutions from credit intermediation altogether.
Such credit constraints are one reason why unemployment rates continue to rise in so many countries – often from already alarming levels, such as 25% in Greece and Spain (where youth unemployment is above 50%) – and why unemployment remains unusually high in countries like the US (albeit it at a much lower level). This is not just a matter of lost capabilities and rising poverty; persistently high unemployment also leads to social unrest, erosion of trust in political leaders and institutions, and the mounting risk of a lost generation.
Indeed, unemployment data in many advanced countries are dominated by long-term joblessness (usually defined as six months or more). Skill erosion becomes a problem for those with prior work experience, while unsuccessful first-time entrants into the labor force are not just unemployed, but risk becoming unemployable.
Governments are doing too little to address the private credit debacle. Arguably, they must first sort out the sovereign side of the crisis; but it is not clear that most officials even have a comprehensive plan.
Policy asymmetry is greatest for the countries most acutely affected by the sovereign-debt crisis. There, the private sector has essentially been left to fend for itself; and most households and companies are struggling, thus fueling continued economic implosion.
Other countries appear to have adopted a “Field of Dreams” – also known as “build it and they will come” – approach to private credit markets, In the US, for example, artificially low interest rates for home mortgages, resulting from the Federal Reserve’s policy activism, are supposed to kick-start prudent financing. The European Central Bank is taking a similarly indirect approach.
In both places, other policymaking entities, with much better tools at their disposal, appear either unwilling or unable to play their part. As such, action by central banks will repeatedly fail to gain sufficient traction.
In fact, only the UK is visibly opting for a more coordinated and direct way to counter the persistent shortfalls stemming from the private part of the credit crisis. There, the “Funding for Lending Scheme,” jointly designed by the Bank of England and the Treasury, seeks “to boost the incentive for banks and building societies to lend to UK households and non-financial companies,” while holding them accountable for proper behavior.The UK example is important; but, given the scope and scale of the challenges, the proposal is a relatively modest one. The program may stimulate some productive credit intermediation, but it will not make a significant dent in what will remain one of the major obstacles to robust economic recovery.
Proper access to credit for productive segments is an integral part of a well-functioning economy. Without it, growth falters, job creation is insufficient, and widening income and wealth inequality undermines the social fabric. That is why any comprehensive approach to restoring the advanced countries’ economic and financial vibrancy must target the proper revival of private credit flows.
This article was originally published by Project Syndicate. For more from Project Syndicate, visit their new Web site, and follow them on Twitter orFacebook.
You can read the whole piece here. If you have been following this rant, it will be familiar to you.