Bernanke, two other Americans win Nobel Prize in Economics

The former chairman of the Federal Reserve, Ben S. Bernanke, Douglas W. Diamond of the University of Chicago and Philip H. Dybvig of Washington University in St. Louis was awarded the Nobel Memorial Prize in Economic Sciences on Monday for their work on banks and financial crises.

The Royal Swedish Academy of Sciences in Stockholm said research published by the three Americans in 1983 and 1984 provided a new understanding of the role banks play in making the economy work and causing it to plunge into crisis.

“Their discoveries improved how society deals with financial crises,” the committee said, crediting the academics with showing policymakers the importance of preventing banks from failing.

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

Bernanke demonstrated that the bank crash—rather than a result of the downturn—was responsible for making it so deep and so long. When banks collapsed, valuable information about borrowers disappeared, making it difficult for new institutions to channel savings into productive investments, the committee said.

During the 2008 crisis, Bernanke piloted the Fed into an expansive use of central bank powers, cutting interest rates to near zero and accumulating assets worth a record $4 trillion in an effort to spur economic activity.

Diamond and Dybvig were honored for pioneering theoretical work, also in 1983, which explained the role of banks in connecting savers and borrowers in a mutually beneficial relationship.

The two men showed how banks resolve an inherent conflict between those with excess funds at all times and those who need more money than they have. Savers want immediate access to their money in case of unexpected expenses, while borrowers want certainty that they will not be forced to repay their loans early, the committee said.

By acting as an intermediary, banks collect savings from several individuals so that they can meet savers’ demands for easy access to their deposits, while at the same time providing long-term loans to companies and others.

Diamond and Dybvig also showed how the essential function of banks makes them vulnerable to rumors of potential collapse. If savers become concerned that a bank is failing, withdrawals can snowball into a destabilizing and self-fulfilling “run” on the bank. The dire outcome can be avoided, as it is in the US, by having the government provide deposit insurance that protects savers against such losses and by having the central bank act as a lender of last resort.

Diamond was also recognized for his 1984 work showing that banks play a critical role in gathering valuable information about borrowers, assessing their creditworthiness and ensuring that loans are used for sound ventures.

The prize committee woke Diamond up with the news of his Nobel and patched him in for the ceremony.

“It came as a surprise,” Diamond said over the phone. “I slept very soundly.”

The three economists will share the prize money of 10 million Swedish kroner, or about 885,810 dollars.

The award comes as world financial leaders prepare for this week’s annual meeting of the International Monetary Fund and the World Bank in Washington, where the global economy is slowing due to high inflation.

Diamond told reporters in brief remarks that the financial system is better equipped today than it was in 2008, and he predicted that central banks will succeed in controlling inflation.

He also said that efforts to design an invulnerable financial system would disrupt its core function, which is to create liquid or readily available assets out of illiquid ones.

“It is possible but not necessarily desirable” to seek such perfection, he said.

The award ceremony was streamed live on the Nobel Institution’s website.

Before Monday’s announcement, a total of 89 people had received the award, formally known as Sweden’s Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.

Last year’s award was shared between David Card of the University of California at Berkeley, who received half of the prize, and two other economists, Joshua Angrist of the Massachusetts Institute of Technology and Guido Imbens of Stanford University, for their work in drawing conclusions at to observe the cause and effect of economic actions in the real world.

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