Bernanke and two other Americans win Nobel Prize in economics

Former Federal Reserve Chairman Ben S. Bernanke, Douglas W. Diamond of the University of Chicago and Philip H. Dybvig of Washington University in St. Petersburg won the Nobel Prize in Economics Monday for their work on banking and the financial crisis.

Research by the three Americans, published in 1983 and 1984, has shed new light on the role banks play in propelling the economy and driving it into crisis, according to the Royal Swedish Academy of Sciences in Stockholm.

“Their findings improve how society responds to financial crises,” the committee said, praising academia for showing policymakers the importance of preventing bank failures.

Bernanke, who led the Fed during the 2008 financial crisis, is recognized for his seminal analysis of the Great Depression in 1983. The committee said his research showed how a bank run turned an ordinary recession of the 1930s into the worst global economic crisis in history.

Bernanke proved that bank failures — not recessions — were what made it so severe and so long. When banks fail, valuable information about borrowers is lost, making it difficult for new institutions to use savings for productive investment, the commission said.

During the 2008 crisis, Bernanke guided the Federal Reserve to use the power of central banks extensively to cut interest rates to near zero and amass a then-record $4 trillion in assets to stimulate economic activity.

The former Fed chairman, now affiliated with the Brookings Institution, said he learned of the award this morning over a phone call from his daughter.

“It was totally unexpected,” he told reporters. “My wife and I both turned off our phones when we slept last night, didn’t think about it, and it was our daughter in Chicago who finally got in touch with us.” Landline Notice This happened to us. “

Diamond and Dybvig were awarded for pioneering theoretical work, also in 1983, that explained the role of banks in linking depositors and borrowers into mutually beneficial relationships.

The two men show how banks can resolve the inherent conflict between those who have excess funds at all times and those who need more cash than they have. Savers want immediate access to funds in the event of unexpected expenses, while borrowers want to ensure they are not forced to repay their loans early, the committee said.

By acting as intermediaries, banks pool savings from multiple individuals, enabling them to meet depositors’ needs for easy access to deposits while providing long-term loans to businesses and others.

Diamond and Dybvig also show how the basic functions of banks make them vulnerable to rumours of potential failures. If depositors grow increasingly concerned that the bank is about to fail, withdrawals could snowball, leading to an unstable and self-fulfilling “run” on the bank. This dire outcome can be avoided by having the government provide deposit insurance to protect depositors from such losses, and by having the central bank operate as the lender of last resort, as in the United States.

Diamond was also recognized for his 1984 work showing that banks play a vital role by gathering valuable information about borrowers, assessing their creditworthiness and ensuring that loans go to sound businesses.

The awards committee woke Diamond with the news of his Nobel Prize and brought him to the ceremony.

“It was really surprising,” Diamond said by phone. “I slept soundly.”

The three economists will share the 10 million kronor prize, or about $885,810.

The award comes as world financial leaders prepare for the annual meetings of the International Monetary Fund and World Bank in Washington this week, as the global economy slows amid high inflation.

While the current situation bears little resemblance to the 2008 crisis he managed at the Fed, Bernanke said financial risks could emerge without warning.

“Even if the financial problems don’t start to show up, over time, if the event makes the financial situation worse, they can exacerbate the problem and exacerbate the problem,” he said. “So I think it’s really something we have to keep close to. things to focus on.”

Diamond told reporters in Stockholm by phone that the financial system was more secure today than it was in 2008, and he predicted the central bank would succeed in controlling inflation.

He also said efforts to design an airtight financial system would interfere with its core function of creating liquid or ready assets from illiquid assets.

The pursuit of such perfection “is possible, but not necessarily desirable,” he said.

The award ceremony was broadcast live on the Nobel Institute’s website.

Before Monday’s announcement, a total of 89 people had been awarded the award, officially titled “The Riksbank Prize for Economic Sciences in Memory of Alfred Nobel.”

Last year’s prize was split between David Card of UC Berkeley and two other economists, Joshua Angrist of MIT and Guido Imbens of Stanford University, for their work that draws conclusions from observations of real-world economic behavior causality.

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