Bernanke, Diamond, Diebwig awarded Nobel Prize in Economics for Banking Crisis Management
A trio of US economists, including former Federal Reserve chief Ben Bernanke, won this year’s Nobel Economics Prize on Monday for laying the foundation for how the world now manages global crises such as the recent pandemic or the Great Recession of 2008.
The trio, including Douglas Diamond and Philip Diebwig, won for their research into how regulating the financial sector and propping up failing banks could stave off an even deeper economic crisis, such as the 1930s. The Great Depression
“The actions taken by central banks and financial regulators around the world in the face of two recent major crises – the Great Recession and the economic downturn triggered by the COVID-19 pandemic – were largely inspired by the research of the award winners, The Swedish Academy announced this year’s award winners.
Governments around the world bailed out banks in 2008 and 2009, sparking a torrent of criticism as ordinary consumers faced losing their homes, even banks, a major culprit of the crisis. was saved.
But society as a whole benefited, the award winners’ research shows.
Diamond said in a news conference with the Swedish Academy, “Even though there are problems with these bailouts, …
Ironically, Bernanke was chairman of the US Federal Reserve at the time of Lehman’s collapse in 2008, which became one of the main catalysts for the world’s biggest financial turmoil since the 1930s.
He argued at the time that there was no legal way to save Lehman, so the next best thing was to let the bank fail and use the government’s financial resources to prevent widespread systemic failures.
Bank runs
The main work of the trio focused on understanding the role of banks in the economy, particularly during financial crisis and how banking failures can prolong and sustain a crisis on their own.
“An important finding in their research is why it is important to avoid bank collapse,” the academy said. “Their analysis is of great practical importance in regulating financial markets and dealing with financial crises.”
The academy said Bernanke, along with statistical analysis, showed that bank runs caused banks to fail, and it was this mechanism that turned the relatively normal recession in the ’30s into the world’s most dramatic and serious crisis.
Bank runs can easily become self-sustaining which can lead to the collapse of an institution and put the entire financial sector at risk.
“These dangerous dynamics can be prevented by the government providing deposit insurance and banks acting as lenders of last resort,” the academy said.
All three join stalwarts such as Paul Krugman and Milton Friedman, past winners of the award.
Most of the previous award winners have been from the United States.
The Economics Prize is not one of the original five prizes created in the 1895 will of industrialist and dynamite inventor Alfred Nobel.
It was established by the Central Bank of Sweden and first awarded in 1969, its full and formal name is the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.
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