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Key Words: A 2022 Nobel laureate in economics says rapid interest-rate hikes pose a threat to the financial system

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One of the three Nobel economics laureates, Douglas Diamond, said Monday that the rapid rise in interest rates is a threat to the financial system.

At a press conference announcing his award, Diamond said the research he did with Philip Dybvig shows what happens when people start to lose faith in the stability of the system.

“ ‘I think many people are surprised how rapidly the nominal interest rates have gone up around the world. That can be something that sets off some fears in the system. We saw some of this in the United Kingdom in their liability driven sector of the insurance market.’ ”

— Douglas Diamond, Professor of Finance at the University of Chicago Booth School of Business

Diamond shares the economics award with former Federal Reserve Chair Ben Bernanke, as well as Dybvig.

The University of Chicago scholar and Nobel laureate did say that banks are better prepared now than they were before the 2008 global financial crisis.

“The problem is that these vulnerabilities, the fear of runs, and dislocation crises, can show up anywhere in the financial sector,” he said. “It doesn’t have to be commercial banks.”

Diamond said it’s possible but it isn’t necessarily desirable to never have a financial crisis. “The point of our work is that’s probably not the best thing to do,” he said. “Because, in many circumstances, the very thing that leads the financial system to crisis is creating more liquid assets that savers would like to hold out of less liquid assets, longer-term illiquid assets, physical plant and equipment, things like that.

It is very difficult to have both the creation of extra liquidity that the financial sector does, combined with universal financial stability, he said.

Worries about the state of financial markets and the global economy have weighed on investment sentiment in 2022, dragging down the Dow Jones Industrial Average
DJIA,
-0.40%
,
the S&P 500 index
SPX,
-0.89%
,
and the Nasdaq Composite Index
COMP,
-2.09%
,
as well as global benchmarks like London’s FTSE 100
UKX,
-0.13%
.

: Why former Fed chief Bernanke and two others won the Nobel economics prize

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