El-Erian's article goes downhill from there

Paragraph 5:

But, at a certain point, confidence in the Washington Consensus turned into something like blind faith. The resulting complacency, among policymakers and economists alike, contributed to the world economy becoming more vulnerable to a series of small shocks that, in 2008, culminated in a crisis that pushed the world to the brink of a devastating multi-year economic depression.

Complacency and small shocks?

No.


Here's some of what El-Erian sees as the problem:

The economics profession did not go far enough to develop a comprehensive understanding of the connection between a rapidly growing and increasingly deregulated financial sector and the real economy. The impact of major technological innovations was poorly understood. And insights from behavioral science were inadequately regarded – if not shunned altogether – in favor of analytically elegant microeconomic underpinnings that were model-friendly, but unrealistic and overly simplistic.

Okay. He's willing to sacrifice the "elegant microeconomic underpinnings" of economics, but that's it. There's nothing wrong with the "rapidly growing and increasingly deregulated financial sector" in his view. Just a failure to understand it.

He's got some nerve. He admits to not understanding the connection between finance and the real economy. He is nevertheless certain that the problem is not the growth of finance, but the failure to understand.

If he does not understand, then he cannot know that there was no problem with the growth of finance.

If he does not understand, he cannot know.

Here. Here's is the "series of small shocks that, in 2008, culminated in a crisis":

Graph #1: Each Vertical Bar is a "Small Shock"

Those vertical bars representing public and private debt: that's evidence of a rapidly growing financial sector. And, frankly, the size of the sector isn't the problem. It's the cost of the finance that's the problem.

Also, it didn't end in 2008.


El-Erian:

At the international level, the established post-war order was increasingly challenged by a rising China...

Domestic policy.

Domestic policy.

To achieve full employment by domestic policy. Remember?

Don't use China as an excuse for your domestic policy failures.


El-Erian:

Even the G20, which emerged when the G7 proved too narrow and exclusive to support effective economic-policy coordination, failed to change the game. A lack of operational continuity, together with disagreements among countries, quickly undermined the G20’s effectiveness, especially after the threat of a global depression had passed.

That's why, if you're going global, you have to have political unification. So that the "disagreements among countries" can be dismissed by a higher authority. As if that will eliminate the disagreement.


El-Erian:

Building consensus around a revised unifying paradigm will not be easy.

There, see? For Mohamed El-Erian, the "Next Economic Paradigm" is not much different from the last one. It's still a unifying paradigm.

Ya can't trust the guy.


El-Erian:

Moreover, feedback loops between the real economy and finance need to be examined in greater depth.

So read my blog, Mo.


His last paragraph:

Complacency was a central reason for the last economic paradigm’s loss of credibility. Let us not allow it to do any more damage than it already has.

See? There was nothing wrong with "the last economic paradigm", he says. The problem was "complacency".

Right, right. And "small shocks".

Part 3 of 3