This year’s Nobel Prize in Economic Sciences has been awarded to former US Federal Reserve chair Ben Bernanke and two US-based economists, Douglas Diamond and Philip Dybvig, “for research on banks and financial crises.”
The prize was announced yesterday by the Nobel panel at the Royal Swedish Academy of Sciences in Stockholm.
The committee said their work had shown in their research “why avoiding bank collapses is vital.”
Photo: AFP
With their research in the early 1980s, the laureates laid the foundations for regulating financial markets and dealing with financial crises, the panel said.
Bernanke, 68, who is now with the Brookings Institution in Washington, examined the Great Depression of the 1930s, showing how dangerous bank runs — when panicked savers withdraw their deposits — can be.
Diamond, 68, based at the University of Chicago, and Dybvig, 67, who is at Washington University in St Louis, showed how government guarantees on deposits can prevent a spiraling of financial crises.
Photo: AP
“The laureates’ insights have improved our ability to avoid both serious crises and expensive bailouts,” said Tore Ellingsen, chair of the Committee for the Prize in Economic Sciences.
Their research took on great real-world significance when investors sent the financial system into a panic during the fall of 2008.
Bernanke, then head of the Fed, teamed up with the US Department of the Treasury to prop up major banks and ease a shortage of credit, the lifeblood of the economy.
He slashed short-term interest rates to zero, directed the Fed’s purchases of Treasury and mortgage investments and set up unprecedented lending programs. Collectively, those steps calmed investors and fortified big banks.
They also pushed long-term interest rates to historic lows and led to fierce criticism of Bernanke, particularly from some 2012 Republican presidential candidates, that the Fed was hurting the value of the US dollar and running the risk of igniting inflation later.
The Fed’s actions under Bernanke extended the authority of the central bank into unprecedented territory. They were not able to prevent the longest and most painful recession since the 1930s.
However, in hindsight, the Fed’s moves were credited with rescuing the banking system and avoiding another depression.
By honoring Bernanke, the prize committee have taken an unusual step of adding an actual practitioner of economic policy to their pantheon. By contrast, many prior winners have stayed firmly rooted in academia.
That is illustrated by the widespread list of research areas celebrated in the past decade. They range from the integration of climate change and technological innovations into economics in 2018, to studies involving global poverty and auction theory in successive years.
“Prior to Bernanke’s study, the general perception was that the banking crisis was a consequence of a declining economy, rather than a cause of it,” the committee said. “Bernanke established that bank collapses were decisive for the recession developing into deep and prolonged depression. Bernanke demonstrated that the economy did not start to recover until the state finally implemented powerful measures to prevent additional bank panics.”
Nobel prizes carry a cash award of 10 million Swedish kronor (US$884,721), which is to be handed out on Dec. 10.
Unlike the other prizes, the economics award was not established in Alfred Nobel’s will of 1895, but by the Swedish central bank in his memory. The first winner was selected in 1969.
Last year, half of the award went to David Card for his research on how the minimum wage, immigration and education affect the labor market. The other half was shared by Joshua Angrist and Guido Imbens for proposing how to study issues that do not easily fit traditional scientific methods.
Additional reporting by Bloomberg
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