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Diamond calls for higher rates today to fight crisis tomorrow
[LONDON] Bob Diamond, the former chief executive officer of Barclays Plc, joined the chorus of financial leaders calling for central banks to raise interest rates so they have more flexibility to address future crises.
"There is no question that we have to continue raising rates and get back to a more normalized level," Mr Diamond said in an interview with Bloomberg Television's Francine Lacqua on Tuesday. "The thing I worry about is, if there is a crisis or accident, and something has to be done, do we have the tools? Have we used all the ammunition in monetary policy?"
Discussing the lessons of the crash of 2008, Mr Diamond said the Federal Reserve's decision to drop interest rates to virtually zero undoubtedly spurred a recovery from the worst economic calamity since the Great Depression, as did the purchase of more than US$1 trillion of mortgage-related securities from stricken firms.
However, Mr Diamond said he's worried that the process known as quantitative easing has left the Fed and the European Central Bank ill equipped to defend the real economy the next time a crash hits. Mr Diamond said it may be tricky for the Fed to raise rates, even though the US economy grew an annualized 4.2 per cent in the second quarter and unemployment is near the lowest this century.
Some US$8 trillion in US corporate debt is coming due by 2020, and refinancing it at higher rates will be a burden on the economy, but rates still need to rise, Mr Diamond said.
"We have a recipe for issues, and how we manage through that is the single biggest impact of the financial crisis today," he said.
Mr Diamond, who led Barclays' purchase of parts of bankrupt Lehman Brothers 10 years ago, was ousted as CEO of Britain's second biggest bank in 2012 amid the fallout from the Libor-rigging scandal that enveloped several institutions. Today he is the CEO and founding partner of Atlas Merchant Capital LLC, which is buying stakes in European banks and broker-dealers, and co-founder of Atlas Mara Ltd, a firm that invests in African financials.