The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse

by Mohamed A. El-Erian

Overview

NEW YORK TIMES BESTSELLER • A roadmap to what lies ahead and the decisions we must make now to stave off the next global economic and financial crisis, from one of the world’s most influential economic thinkers and the author of When Markets Collide • With a new introduction by the author

“The one economic book you must read now . . . If you want to understand [our] bifurcated world and where it’s headed, there is no better interpreter than Mohamed El-Erian.”—Time

Our current economic path is coming to an end. The signposts are all around us: sluggish growth, rising inequality, stubbornly high pockets of unemployment, and jittery financial markets, to name a few. Soon we will reach a fork in the road: One path leads to renewed growth, prosperity, and financial stability, the other to recession and market disorder.

In The Only Game in Town, El-Erian casts his gaze toward the future of the global economy and markets, outlining the choices we face both individually and collectively in an era of economic uncertainty and financial insecurity. Beginning with their response to the 2008 global crisis, El-Erian explains how and why our central banks became the critical policy actors—and, most important, why they cannot continue is this role alone. They saved the financial system from collapse in 2008 and a multiyear economic depression, but lack the tools to enable a return to high inclusive growth and durable financial stability. The time has come for a policy handoff, from a prolonged period of monetary policy experimentation to a strategy that better targets what ails economies and distorts the financial sector—before we stumble into another crisis.

The future, critically, is not predestined. It is up to us to decide where we will go from here as households, investors, companies, and governments. Using a mix of insights from economics, finance, and behavioral science, this book gives us the tools we need to properly understand this turning point, prepare for it, and come out of it stronger. A comprehensive, controversial look at the realities of our global economy and markets, The Only Game in Town is required reading for investors, policymakers, and anyone interested in the future.

Product Details

ISBN-13:	9780812997620
Publisher:	Random House Publishing Group
Publication date:	01/26/2016
Pages:	320
Product dimensions:	6.30(w) x 9.30(h) x 1.20(d)

About the Author

Mohamed A. El-Erian is the chair of President Obama’s Global Development Council and chief economic advisor at Allianz, the corporate parent of PIMCO where he was previously the CEO and co-CIO. He is a contributing editor at the Financial Times and a Bloomberg columnist. Earlier in his career, he served as Deputy Director at the International Monetary Fund, Managing Director at Salomon Smith Barney, and president and CEO of the Harvard Management Company. El-Erian was on Foreign Policy’s list of Top 100 Global Thinkers for four consecutive years, and named by that journal as one of the 500 most powerful people on the planet. He is regularly on CNN, CNBC, and Bloomberg, and his writings have also appeared in Fortune, The Wall Street Journal, The Washington Post, Business Insider, Newsweek, The Atlantic, Latin Finance, Project Syndicate, and other outlets. El-Erian’s last book, When Markets Collide, was a New York Times and Wall Street Journal bestseller, won the Financial Times/Goldman Sachs Award for best business book of the year, was named as a best book of the year by The Economist, and was called a best business book of all time by The Independent. El-Erian earned his master’s degree and doctorate at Oxford University, having obtained his undergraduate degree at the University of Cambridge, where he holds an honorary fellowship at Queens’ College.

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Chapter 1
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Excerpted from "The Only Game in Town"
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Copyright © 2016 Mohamed A. El-Erian.
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Table of Contents

Introduction xvii

Preamble xxiii

Part I The Why, How, and What of this Book

1 Setting the Stage 5

2 The Only Game in Town 11

3 Central Banks' Communication Challenge 18

4 How and Why This Book Is Organized 25

Part II Context: The Rise, Collapse, and Resurrection of Central Banking

5 The Golden Age of Central Banks and "Bubblish Finance": A Brief Historical Perspective 31

6 Cascading Failures 38

7 Central Bank Resurrection: Durable or a Dead Cat Bounce? 48

Part III From the What to the So What

8 Setting the Stage: The Ten Big Challenges 59

9 The Quest of a Generation: Sustaining Inclusive Growth 63

10 Reducing the Risk of the Unemployed Becoming Unemployable 81

11 The Inequality Trifecta 84

12 The Persistent Trust Deficit 91

13 National Political Dysfunction 97

14 The "G-O" Slide into the "International Economic Non-System" 102

15 The Migration and Morphing of Financial Risks 108

16 The Liquidity delusion 114

17 Bridging the Gap Between Markets and Fundamentals 120

18 It Is Hard to Be a Good House in a Challenged Neighborhood 132

Part IV The Desirable Way Forward

19 Addressing the Ten Big Challenges: Dealing with Willing Central Banks That Lack Sufficient Tools 141

20 The Reduced-Form Approach to a Grand Policy Design 145

Part V From What Should Happen To What Is Likely To Happen

21 When Desirable and Feasible Differ 169

22 Turning Paralyzing Complexity into Actionable Simplicity 175

23 The Belly of the Distribution of Potential Outcomes 179

24 A World of Greater Divergence (I): Multi-Speed Growth 182

25 A World of Greater Divergence (II): Multi-Track Central Banks 189

26 A World of Greater Divergence (III): Non-Economic, Non-Policy Headwinds 193

27 A World of Greater Divergence (IV): Disruptive Innovation Goes Macro 200

28 Putting It All Together 211

Part VI The Keys to Navigating a Bimodal Distribution

29 What History Tells Us 217

30 Recognizing Blind Spots and Overcoming Biases 223

31 Advancing and Enhancing Cognitive Diversity 229

32 Translating Awareness into Optionality, Resilience, and Agility 233

33 The Power of Scenario Analyses 238

34 Valuing Liquidity and Optionality 244

Part VII Bringing It All Together

35 In Sum 251

Acknowledgments 267

Notes 271

Index 287

Editorial Reviews

El-Erian expertly offers a balanced view, commending the central banks for their necessarily aggressive policy views while noting, for example, the failure of the Fed to recognize the pre-crisis housing bubble. But title aside, this is hardly just a book about central banks. Instead, El-Erian offers a grand tour of the challenges we face, along with ideal solutions and more likely outcomes…All in all, this is an accessible…cruise through pretty much all things economic.

The New York Times Book Review - Steven Rattner

01/04/2016
El-Erian, former CEO of investment firm Pimco, sets the stage for his well-informed, if sometimes overstretched, argument with a Larry Summers quote: "The world has largely exhausted the scope for central bank improvisation as a growth strategy." Central banks have pulled the world out of the Great Recession, but the critical task of creating sustainable global economic growth—not temporary money bubbles—remains. If governments don't accomplish this, they risk opening a geopolitical Pandora's Box: generational joblessness; worsening inequality; eroding institutional credibility; political dysfunction; and financial excess. El-Erian's formula for avoiding this is reduced to four basic prescriptions: seriously address economic growth; match ability and willingness to spend; reduce the burden of debt; and improve policy coordination. El-Erian is at his best when he sticks to what he knows: finance. But his thesis is that finance only takes you so far, so his book's last section finds him verging into trendy but less relevant territory with references to "cognitive diversity" and quotes from Sheryl Sandberg. These passages tend to deviate from his usual intellectual rigor with Oprah-like feel-good mantras. Nonetheless, this is a prescient warning against our current overreliance on central banks—and a call to action toward building a sustainable global economy. Agent: Andrew Wylie, Wylie Agency. (Feb.)

Publishers Weekly

02/01/2016
El-Erian (chief economic adviser, Allianz; chair, President's Global Development Council) examines the subject of central banks in his latest book, following his award-winning When Markets Collide. Rather than providing a simple overview of central banks and their role, El-Erian uses the bank as a backdrop for discussing the current crossroads he sees in the global economy and the role these institutions could play in shaping the future. After presenting ten big issues, including those related to unemployment, economic expansion, and political dysfunction, El-Erian provides his ideas for what should happen next, but also for what is likely to happen, a distinction he explains as the difference between what is desirable and what is actually feasible given the current political environment. VERDICT This easy-to-read discussion from a well-respected financial industry insider on the current state of the economy and the role of central banks will satisfy anyone who wants to learn about economics or the policy decisions that affect financial stability.—Elizabeth Nelson, McHenry Cty. Coll. Lib., Crystal Lake, IL

Library Journal

2015-12-07
The chair of Barack Obama's Global Development Council warns that the economy is bound for more bumpiness, stress, and course-altering ahead, "potentially quite suddenly." El-Erian (When Markets Collide, 2008) charts the changing role of central banks in national economies and the global economy at large. Their overarching mission is to provide their home nations with a stable currency and, beyond that, stable monetary and financial operations—macro goals that are defined by government but then effected by bankers. The bankers have lately exercised more and more autonomy, though, without much direct political control and with ever expanding responsibilities to govern the "fate of the global economy." In the case of the Federal Reserve, for instance, stability is understood to involve providing for stable prices, economically productive interest rates, and a thriving job market while reducing risk—all good goals but hard to contain under one roof. In the new climate of a post-recessionary nervousness and a sluggish recovery without the elastic rebound of previous ones, the author suggests, we seem to be in a different mode than the business cycle of old. Consequently, central banks are experimenting, even making things up as they go along, in order to jump-start economies, for instance, by putting into place negative interest rates and other "unconventional monetary policies" without any precedent or historical examples to follow. The natural result is instability from above and below, from the supply side and the demand side, and a "new normal" that the author wishes could be seen as a "new abnormal." Central banks, their briefs thus much expanded, must do what they can to contain market volatility. As El-Erian's discussion moves on, it becomes increasingly technical so that, by the end, readers must contemplate the challenging implications of, say, limiting exposure to "any specific set of securities that has a repeated history of suddenly losing market liquidity." Fiscal-policy wonks will find this look at the financial system illuminating, though ordinary investors and civilians will find it daunting.

Kirkus Reviews

How come the global economy is now run largely by unelected central banks? In this highly intelligent analysis, the author, a respected investor and CEO, explains how elected governments are failing in their basic job to take care of the economy and why this might lead to a massive unmanageable crisis.”—Fareed Zakaria, CNN (book of the week)

“El-Erian expertly offers a balanced view, commending the central banks for their necessarily aggressive policy views while noting, for example, the failure of the Fed to recognize the pre-crisis housing bubble. But title aside, this is hardly just a book about central banks. Instead, El-Erian offers a grand tour of the challenges we face, along with ideal solutions and more likely outcomes. . . . We desperately need a system in which the central banks are no longer the only game in town.”—Steven Rattner, The New York Times Book Review

“What better moment could there be for a book subtitled ‘Central Banks, Instability, and Avoiding the Next Collapse’? And who better to write it than Mohamed El-Erian—the man who captured the essence of the present era of low growth, low inflation and low investment returns better than anyone else with his memorable concept of the ‘new normal’? . . . It is refreshing to read a policy book with the confidence to say that it is pointless to dispense elevator-pitch solutions to epochal economic challenges. . . . [A] sobering book.”—Financial Times
 
“A warning on the Federal Reserve’s limits . . . For those who consider Washington politicians incapable of acting effectively, [El-Erian’s] diagnosis is chilling. . . . What’s vital now, Mr. El-Erian argues, are large-scale investments in the ‘real economy’ with greater potential to create stable, widely distributed growth. They are measures only a president and Congress can take: improved public infrastructure, enhanced education and job training, an overhaul for a convoluted tax system rife with perverse incentives.”—The New York Times

“Mohamed El-Erian has had an extraordinary career as an investment analyst, investor, and market commentator. His ‘new normal’ concept was prescient, provocative, and has proven out. Agree or disagree, his go-forward thoughts contained in this bracing book are well worth considering.”—Lawrence H. Summers, former secretary of the U.S. Treasury

“The Only Game in Town achieves the nearly impossible: It takes complex financial issues and events and makes them both enlightening and entertaining. It’s a must-read for anyone who cares about the global economy and its future, raising critical questions, exploring all the relevant topics, and offering sound policy recommendations. It’s a terrific book.”—Jack Welch
 
“The Only Game in Town may well be the only book you need to read on how the global financial system works, the serious trouble we may be in, and what to do about it. El-Erian’s gift for clarity and his use of compelling examples make important economic issues accessible.”—Anne-Marie Slaughter, president and CEO, New America
 
“From the rise of Airbnb and disruptive technologies to worries about Russian foreign policy and turmoil in the Middle East to negative interest rates and ‘the new mediocre,’ the world is an increasingly confusing place. The job of policymakers is mind-bogglingly hard. Who better than Mohamed El-Erian, with his knowledge of markets, his knowledge of policy, and his brilliant mind, to help organize their (and our) thoughts. The Only Game in Town is a great read.”—Olivier Blanchard, senior fellow at the Peterson Institute for International Economics
 
“Today’s global economy is beset by low growth and rising inequality. By looking at the tools now being used by the world’s major central banks, Mohamed El-Erian shows how we can instead promote inclusive economic growth. This is a must-read from one of the most astute financial analysts of our time.”—Walter Isaacson, author of Steve Jobs
 
“Widely regarded as one of the most astute observers of global economic trends, Mohamed El-Erian is famous for having coined the now-ubiquitous phrase ‘the new normal.’ Five years ago, he was worried that the global economy might take years to regain its footing. Now El-Erian worries it could fall off a cliff. The Only Game in Town is simply a must-read for anyone trying to understand how the global economy might unfold in the next five years.”—Kenneth Rogoff, Thomas D. Cabot Professor of Public Policy at Harvard University, and former chief economist and director of research at the International Monetary Fund
 
“Mohamed El-Erian knows the global economy as an investor, a public servant, and as an analyst with a rare ability to grasp its essentials. He has an urgent message to convey here: Central banks cannot continue to carry the global economy on their backs for much longer without a high risk of a very bad global outcome. If he’s right—as he has often been before—all of us, governments, business, finance, and individuals, need to understand why and how to take evasive action.”—Jessica Mathews, former president, Carnegie Endowment for International Peace

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