Mohamed A. El-Erian Postulates a ‘Bandwagon Effect’ Amongst Banks – Citi’s Jane Fraser Voices Recession Plausibility

Jane Fraser said the US will have a hard time avoiding a recession.

“The more the banks act on such warnings, including by tightening lending, the higher the risk of a US recession moving from a risk scenario to more baseline” – Mohamed A. El-Erian (Ex PIMCO CEO)

By banks restructuring their exposure and looking for hedges, the supply of loanable funds decreases making it difficult for borrowers to obtain financing, synonymous with higher borrowing costs.

The concern for El-Erian is not the prudency banks are undergoing, but to what degree these actions are in excess of current fundamentals and at a rate faster than current rate hike expectations. Such that, as Soros in his theory of reflexivity regarding feedback loops, would lead to significant increases in the probability of a recession. 

Is Mohamed A. El-Erian making a valid point? Or might the Investment banks have a better idea of what the baseline probability of a US recession is?

If the latter is true, household budgets should probably revise expectations too.

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