REUTERS/Fred Prouser
- Risks have shifted from financial to economic contagion, Mohamed El-Erian said.
- The lending crunch caused by the bank crisis will drag on, the top economist told Bloomberg TV.
- "This will play out probably in the third and fourth quarter and it will have a long tail."
While the worst of the bank crisis seems to have eased, risks are shifting from financial to economic contagion with no quick end in sight, Mohamed El-Erian told Bloomberg TV.
On Friday, the top economist said "the flashing red" phase is over, and the crisis is now in the "flashing yellow" phase.
He also contrasted the slower-moving credit crunch triggered by Silicon Valley Bank's failure with the abrupt freeze during the Great Financial Crisis
"This is not 2008 — 2008 was a sudden stop, where things just stopped because the payments and settlement system was play," he said. "This is very different. This will play out probably in the third and fourth quarter and it will have a long tail."
Even prior to the collapse of the Silicon Valley Bank, financial institutions were beginning to tighten their lending standards as the Federal Reserve aggressively hiked interest rates to nearly 5% in a year's time.
However, this month's implosion of banks, from SVB to Credit Suisse, has hastened the credit-tightening process as lenders look to preserve capital, threatening an economic downturn as fewer businesses are able to borrow.
Asked about a solution, El-Erian noted on regulators can fix past mistakes on supervision under existing rules and with potential new ones.
"But we must be really careful because if we go overboard on regulation, this will cause banks to be even more cautious," he added.
What the Federal Reserve should not do is prematurely ease monetary policy, El-Erian warned, as this would lead to stagflation and further financial instability.
He urged central banks to not forget that their responsibility is to uphold price stability and not financial stability.
"The reason why the market thinks that we kind of get a cut as early as June, is they believe that the Fed is going to be reacting not to a significant decline in core inflation," he said, "but it's going to be reacting to something else. And I think that would be a mistake."