Shares His Outlook For 2014
By Tiffany Rider - Editor
January 21, 2014 – Mohamed El-Erian, Ph.D., CEO and co-CIO of the $2 billion global investment management firm PIMCO based in Newport Beach, comes to Long Beach next month to discuss ethical leadership in everyday life and business.
El-Erian is the keynote speaker for “Living Ethics Every Day,” the annual ethics seminar sponsored by the Ukleja Center for Ethical Leadership at California State University, Long Beach College of Business Administration, in partnership with the Long Beach Area Chamber of Commerce. He is also this year’s recipient of the Nell and John Wooden Ethics in Leadership Award. The event is being held at 7:15 a.m. on February 27 at the Hyatt Regency Long Beach.
For the seminar, El-Erian is expected to discuss financial institutions’ ethical decisions, or lack thereof, leading up to the economic collapse in 2007-2008. In this interview with the Business Journal, El-Erian touches on this topic and also offers his expectations for financial markets and the overall economy in 2014.
PIMCO CEO and co-CIO Mohamed El-Erian is the recipient of the
2014 Nell and John Wooden Ethics In Leadership Award, to be presented at the
“Living Ethics Every Day” annual ethics seminar
in Long Beach on February 27. El-Erian will serve as the keynote speaker for the event.
LBBJ: How did ethics and trust play a role in the 2008 financial meltdown and efforts to resolve the situation?
El-Erian: There were several factors that culminated in the 2008 global financial crisis. First, the developed world overdosed on debt and credit entitlement, with too many people becoming enamored with financial engineering and “finance” as an end in itself and not as a means to fund productive economic activities. Second, unquestioned faith in the efficiency of unfettered markets encouraged excessive risk-taking. Third, too many incentives in the banking system favored irresponsible short-term behaviors. And, finally, this horrid cocktail was accentuated by lax regulation and prudential supervision.
In the aftermath of the crisis, more rational thinking has prevailed, starting with the realization that finance is not a standalone activity but, rather, meant to efficiently fund investments in people, ideas, plant and equipment.
There are also important changes being made to the financial landscape, including a strengthening of prudential supervision and regulation. This is being supplemented by greater emphasis within financial institutions on updated codes of conducts. Progress has also been made in re-aligning incentives, though there is more to be done here. Finally, at the multilateral level initiatives like the United Nations-backed Principles for Responsible Investment are encouraging and reinforcing the need for financial institutions to keep ethics and good business practices in focus when making investment decisions.
LBBJ: How would you paint the ethical landscape in domestic and international business and politics?
El-Erian: It is very hard to generalize across companies, let alone across national jurisdictions. Indeed, it may be more productive to ask how ethics underpin a company or government’s culture and, therefore, daily responses.
At PIMCO, we have stressed since day one that the interests of the client always, always come first. This influences what we do on a daily basis, where we invest in growth, how we organize ourselves, and also a range of other business practices.
Also, research shows – and PIMCO believes strongly – that diversity of people, mindsets and thought processes is an important contributor to better outcomes, as are continuous efforts to maintain a level playing field by empowering, mentoring, training our staff.
LBBJ: Peering into your crystal ball, what do you envision for 2014 in terms of the economy and the financial markets?
El-Erian: There’s good reason to be more optimistic about the global economy in 2014. We expect the U.S. to grow between 2.25 and 2.75 percent, with a 3 percent annual rate possible. Europe will climb out of a very painful recession. And emerging markets will stabilize, including China. So the outcome will likely be higher and more balanced global growth, albeit still unfortunately falling short of “escape velocity” for the U.S. and Europe in particular.
Meanwhile, inflation should remain low, which should keep global central banks from raising interest rates any time soon. We do expect the Federal Reserve, however, to end its quantitative easing program by the end of the year by gradually reducing its purchases while, simultaneously strengthening its forward guidance policy.
LBBJ: Is there anything else you would like to add?
El-Erian: I would just point to an encouraging development – that is the increased attention being given to the detrimental effects of growing and excessive inequalities in income, wealth and opportunities. The national debate is rightly evolving to include economic considerations to the more traditional social and political aspects. Specifically, a growing number of economists correctly believe that excessive inequality hurts an economy’s growth potential.
If leaders, whether in government or the private sector, fail to recognize that such excessive inequality could erode trust in the “system” to give everyone a fair shake, as well as its effectiveness to deliver growth, society as a whole will suffer – both current and future generations.
Just like it is hard to maintain the value of a good home in a deteriorating neighborhood, an economy cannot be sustained by the mounting riches of the few. Growing economic insecurity of the many, if left alone, will have profound implications for the global economy.