Ben Bernanke, the former chairman of the US Federal Reserve, was awarded the Nobel Prize in Economics this year along with Douglas Diamond of the University of Chicago and Philip Dybvig of the University of Washington, for their work on the role of banks in the economy and financial crises.
The committee that awarded the SKr 10 million ($886,000) prize said the work of the winners, which began in the early 1980s, had “improved our ability to avoid both severe crises and bailouts. costly”. The trio will share the prize equally.
“We didn’t know it then, but 15 years ago much of the world was on the brink of a devastating economic crisis. Most of us weren’t prepared for it. A few academic economists were both prepared and worried,” Hans Ellegren, secretary general of the Royal Swedish Academy of Sciences, said Monday.
The committee took the unusual step of awarding the prize to an economist better known for his role in policy-making than for his academic contributions. But Bernanke, who oversaw the Fed’s response to the 2008 global financial crisis and subsequent recession, was already known for his analysis of the Great Depression of the 1930s – in which he showed that bank runs had been a decisive factor in the crisis. so deep and prolonged.
His insight, which ran counter to conventional wisdom at the time, underpinned “crucial elements of economic policy” not only in the Fed’s response to the 2008 crisis, but also in the actions taken. to avoid a more severe global downturn when the coronavirus pandemic hit in 2020, the committee said.
Bernanke, who led the Fed for two terms from 2006 to 2014, has been criticized in some quarters for failing to foresee the 2008 crisis and failing to tackle problems in housing markets and then rolling out huge sums of public money to save some Wall Street companies from the consequences of their bets on subprime mortgages.
He also pioneered the use of unconventional monetary policy, launching the Fed’s quantitative easing program to stimulate the economy when interest rates were already at zero. Some economists believe that accommodative monetary policy has been instrumental in restoring growth to the US economy; but others say it fueled inequality, artificially inflated asset prices and ushered in a period of cheap money that sowed the seeds of the current inflation crisis.
Diamond and Dybvig laid the foundation for modern banking regulation by developing theoretical models showing why banks exist, why they are vulnerable to rumors of impending collapse, and how that vulnerability can be addressed, the committee said.
In a key article published in 1983, the two men explained that banks perform a crucial function by acting as intermediaries between savers, who want instant access to their money, and borrowers, who need long-term financing. term – but are inherently vulnerable when people begin to believe that more savers are about to withdraw money than the bank can handle.
Diamond and Dybvig presented a possible solution to this problem: deposit insurance schemes in which governments guarantee savers’ money, stopping a bank run before it starts. Systems of this type are now in place in many countries.
The committee also drew attention to a 1984 article published by Diamond, in which it showed that banks play an important role in monitoring borrowers to ensure that they will honor their debts – reducing losses and thereby maintaining the cost of credit for the benefit of society as a whole. Widespread bank failures can lead to the loss of acquired knowledge by borrowers.
The economics prize – officially known as the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel – was the latest Nobel prize this year. The work of the three winners has jointly shown the importance of preventing widespread banking collapses, with great practical effects, the committee said.
Diamond, speaking after the price announcement on Monday, said recent memories of the 2008 crisis and the improved regulation put in place as a result had left the system far less vulnerable than in the past. This was the case even though the rapid global rise in interest rates to cope with soaring inflation had “triggered fears around the system”, as seen recently in the turmoil around pension funds. British.
But he warned that while banks were “in good shape”, problems could arise in other areas where there was a mismatch between assets and liabilities. “Crises can appear anywhere in the financial sector – it doesn’t have to be commercial banks,” he said.