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Welcome to 'Great Moderation 2.0,' says El-Erian

There is a real threat of a credit boom and collapse, as the market enters a period of decreased macroeconomic volatility, former Pimco CEO Mohamed A. El-Erian told CNBC on Friday.

Mohamed El-Erian
Emile Warnsteker | Bloomberg | Getty Images
Mohamed El-Erian

"This market is now settling into the Great Moderation 2.0. This perception—that we are in a range-bound economy and predictable policies and that's going to cause quite a few rotations within the market," said El-Erian said on "Closing Bell."

The Great Moderation, which stretched from the mid-1980s to 2007, was defined by low interest rates and below-average volatility. Ultimately, it led to a credit crisis.

El-Erian, chief economic advisor at Allianz, is concerned the market could see another credit crunch, at least if a slew of carry trades are any indicator. By the way, a carry trade simply means borrowing at a low interest rate to invest in an asset that provides a higher rate of return.

Read More Small caps edge to full-blown correction territory

He pointed to Greece issuing bonds at below a 5 percent yield, while yields on Italian and Spanish bonds are at record lows of below 3 percent, as recent examples.

"The minute you tell someone that we're in a Great Moderation, then the temptation to lever any risk element is huge. So we're seeing a major compression in the equity risk premium, in the credit risk premium, in the default risk premium, the liquidity and volatility," El-Erian said. "So I worry that people may be getting too comfortable with this notion, especially that the Fed is going into a more uncertain policy environment."

Separately, El-Erian said now is a good time to take profits considering the sluggish U.S. economy and geopolitical concerns around the world, including and especially surrounding Ukraine.

—By CNBC's Drew Sandholm

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