A trio of US economists, including former Federal Reserve Chairman Ben Bernanke, won this year’s Nobel Prize in economics for laying the groundwork for how major powers handle global crises such as recent pandemic or the Great Recession of 2008.
Bernanke, Douglas Diamond and Philip Dybvig were recognized on Monday for their work on how regulating banks and supporting failed lenders with public cash could avert an even bigger economic crisis. even deeper, such as the Great Depression of the 1930s.
“The actions of central banks and financial regulators around the world in the face of two recent major crises – the Great Recession and the economic downturn caused by the COVID-19 pandemic – part is driven by the laureates’ research,” the Swedish Academy said in announcing this year’s award winners.
Governments around the world bailed out banks in 2008 and 2009, creating a barrage of criticism as the average consumer suffered. Many people lost their homes even as the banks, the main culprits of the crisis, were saved.
But society as a whole benefits and bailouts, even if morally questionable for some, are likely to prevent more pain, study laureates shows.
“Even though these bailouts are problematic… they can actually be good for society,” Diamond, a professor at the University of Chicago, said at a press conference with the Swedish Academy. He suggested that preventing the collapse of the US investment bank Lehman Brothers would make the 2008 crisis less severe.
“Perhaps it would have been better if Lehman Brothers hadn’t collapsed all of a sudden,” Diamond said. “If they find a way, I think the world will be less prone to severe crises.”
Ironically, Bernanke was chairman of the US Federal Reserve at the time of Lehman’s collapse, which became one of the main catalysts of the world’s biggest financial crisis since the 1930s.
Bernanke, now a fellow at the Brookings Institution in Washington, argued at the time that there was no legal way to save Lehman, so the next best thing was to let it fail and use financial resources. government to prevent broader systemic failures.
Part of that response, which included ultra-low interest rates and massive central bank asset purchases, was reversed now like Inflation is at its highest for about half a century in many parts of the world.
The work of the Nobel laureates also has implications for the current economic turmoil as record rate hikes to combat inflation increase the risk of a recession that is sure to challenge the financial sector. main.
“Some households and some companies have weakened,” said Gernot Doppelhofer, a professor at the Norwegian School of Economics.
“This study shows how the financial system can amplify shocks and how it tries to stabilize the economy while ensuring the stability of the financial system,” he said.
Bank runs
“What Bernanke did was to demonstrate that banks played a central role in turning relatively small recessions into a crisis in the 1930s, and that was the worst economic crisis that ever happened. the world has seen since,” said John Hassler, professor of economics and a member of the committee that awarded the Nobel Prize in economics.
Banking operations can easily become complacent, leading to the downfall of an institution and putting the entire financial sector at risk.
Dybvig, a professor at Washington University in St Louis, and Diamond argue that banks that accept short-term deposits and lend long-term cash are the most efficient way for the financial sector to function.
But such an arrangement also makes them easy to run away. Risk can be mitigated through “authorized custodianship”, whereby banks act as intermediaries between savers and borrowers.
This will spread risk and ensure efficiency as banks are better suited to assess creditworthiness and monitor money usage, said the Royal Swedish Academy of Sciences, which awarded the prize. .
The three economists will receive equal shares in the prize money of 10 million Swedish crowns ($885,000).
They join well-known economic firms such as Paul Krugman and Milton Friedman as award winners.
The majority of previous laureates are from the United States.
The economics prize is not one of five originally created in the 1895 will of industrialist and dynamite inventor Alfred Nobel.
It was established by Sweden’s central bank and was first awarded in 1969.
