"It's a matter of that being worked through the system. That's what we're seeing now."
"It's ugly, it's messy ... but that's the reality when you have a system that is damaged. As it recovers it has to get rid of the damaged parts," El-Erian added.
(Watch the full CNBC interview with Mohamed El-Erian).
Part of that pain is the reality that certain elements in the market--hedge funds in particular-- will have to "sell and get out of the way." As that happens, the market will reprice and get stocks down to a sustainable value, he said.
"We're getting close to the point where the market will finish repricing. Today we're going to take a major step toward that, but you don't reprice until you get rid of the damage," El-Erian said.
"We're starting to see the end of this massive deleveraging process. Now, it's too early to declare a complete green light because the economy is weakening. And that's the thing we have to look at, the extent to which the real economy is coming under pressure."
El-Erian predicted the Federal Reserve will have to step in within the next few days and cut interest rates again. He said the strategy of policy markers probably will come under intense scrutiny.
"Everybody likes second-guessing," he said. "The reality is there probably was something that could have been done. It's very difficult to figure out what and when. The problem with crises is there is no perfect policy response."