Bernanke, Diamond, Dybvig Nobel Prize in Economics for Banking Crisis Management
A trio of American economists, including former head of the Federal Reserve, Ben Bernanke, won this year’s Nobel Prize in economics on Monday for laying the groundwork for how the world is now dealing with global crises such as the recent pandemic or the Great Recession of the United States. 2008.
The trio, which also includes Douglas Diamond and Philip Dybvig, won the prize for their research into how regulating the financial sector and sustaining failing banks can prevent an even deeper economic crisis, such as the Great Depression of the 1930s. .
“The measures taken by central banks and financial regulators around the world in addressing two recent major crises – the Great Recession and the economic downturn caused by the COVID-19 pandemic – were largely prompted by the research of the laureates,” the report said. Swedish Academy said at the announcement of this year’s award winners.
Governments around the world bailed out banks in 2008 and 2009, sparking a torrent of criticism as ordinary consumers suffered from many losing their homes, even as banks, a major culprit of the crisis, were bailed out.
But society as a whole benefited, the laureates’ research suggests.
“Even though these bailouts have problems,… they can actually be good for society,” Diamond told a news conference with the Swedish Academy, arguing that preventing the collapse of a financial company like Lehman Brothers will ease the crisis. would have made it serious.
Ironically, Bernanke was the chairman of the US Federal Reserve at the time of Lehman’s collapse in 2008, which became one of the main catalysts of the world’s greatest financial turmoil since the 1930s.
He argued at the time that there was no legal way to save Lehman, so it was best to let the bank fail and use the government’s financial resources to avoid wider systemic failure.
BANK RUNNING
The trio’s main work has focused on understanding the role of banks in the economy, particularly during financial crises, and how bank failures can amplify and sustain a crisis.
“A key finding in their research is why avoiding bank collapses is vital,” the academy added. “Their analyzes have been of great practical importance in regulating financial markets and managing financial crises.”
The Academy said Bernanke showed with statistical analysis that bank runs led to bank failures and that this was the mechanism that turned a relatively ordinary recession in the 1930s into the depression, the world’s most dramatic and severe crisis.
Bank runs can easily become self-fulfilling, which can lead to the collapse of an institution and put the entire financial sector at risk.
“These dangerous dynamics can be avoided by the government providing deposit insurance and acting as a last resort for banks,” the Academy said.
The trio joins celebrities like Paul Krugman and Milton Friedman, past winners of the award.
Most previous laureates came from the United States.
The Economic Prize is not one of the original five awards awarded in 1895 to industrialist and dynamite inventor Alfred Nobel.
It was founded by the Central Bank of Sweden and first awarded in 1969, its full and formal name is the Sveriges Riksbank Prize for Economic Sciences in memory of Alfred Nobel.
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