Former US Federal Reserve Chairman Ben Bernanke, who put his academic experience in the Great Depression at the service of reviving the US economy after the financial crisis of 2007-2008, won the Nobel Prize for Science Economics along with two other US-based economists for their research on the consequences of bank failures.
Bernanke was recognized Monday along with Douglas W. Diamond and Philip H. Dybvig. The Nobel panel at the Royal Swedish Academy of Sciences in Stockholm said the trio’s research had shown “why avoiding bank collapses is vital.”
With their findings in the early 1980s, the laureates laid the groundwork for regulating financial markets, the panel said.
“Financial crises and depressions are the worst thing that can happen to the economy,” said John Hassler of the Prize Committee in Economic Sciences. “These things can happen again. And we need to have an understanding of the mechanism behind that and what to do about it. And this year’s laureates provide just that.”
Bernanke, 68, who now works at the Brookings Institution in Washington, examined the Great Depression of the 1930s and showed the danger of bank runs, when people in panic withdraw their savings, and how bank collapses led to widespread economic devastation. Before Bernanke, economists viewed bank failures as a consequence, not a cause, of economic downturns.
Diamond, 68, who works at the University of Chicago, and Dybvig, 67, who studies at Washington University in St. Louis, demonstrated how government deposit guarantees can prevent spiraling financial crises. In 1983, they co-authored Bank Runs, Deposit Insurance, and Liquidity, which in part addressed the harm caused by bank runs.
Diamond said the Nobel was a surprise. On Monday morning, she said: “I was sleeping very soundly and then all of a sudden my cell phone went off” with good news from the Nobel committee.
When it comes to the global economic turmoil created by the COVID-19 pandemic and Russia’s war in Ukraine, Diamond said the financial system is “much, much less vulnerable” to crises due to memories of the decade-old crash. 2000 and improved regulation.
“The problem is that these vulnerabilities of fear of runs, dislocations and crises can appear anywhere in the financial sector. It doesn’t have to be the commercial banks,” he said.
The trio’s investigation took on real-world significance when investors panicked the financial system in the fall of 2008.
Bernanke, then head of the Federal Reserve, teamed up with the US Treasury Department to prop up major banks and ease a shortage of credit, the lifeblood of the economy.
He cut short-term interest rates to zero, directed the Federal Reserve’s purchases of Treasury bonds and mortgage investments, and established unprecedented lending programs. Collectively, those steps calmed investors and strengthened the big banks.
They also pushed long-term interest rates to record lows and drew strong criticism of Bernanke, particularly from some 2012 Republican presidential candidates, that the Fed was hurting the value of the dollar and risking inflation later.
The Fed’s actions under Bernanke extended the central bank’s authority into unprecedented territory. They failed to prevent the longest and most painful recession since the 1930s. But in retrospect, the Fed’s moves were credited with rescuing the banking system and preventing another depression.
And Bernanke’s Fed set a precedent for the central bank to respond quickly and forcefully to economic shocks.
When COVID-19 hit the US economy in early 2020, the Federal Reserve, under Chairman Jerome Powell, quickly cut short-term interest rates to zero and pumped money into the financial system. Aggressive intervention, coupled with massive public spending, quickly ended the recession and triggered a powerful economic recovery.
But the quick recovery also came at a cost: Inflation began rising rapidly last year and is now near 40-year highs, forcing the Fed to reverse course and raise rates to cool the economy. Central banks around the world are also taking action as inflation erodes consumers’ purchasing power.
In a groundbreaking 1983 article, Bernanke explored the role of bank failures in deepening and prolonging the Great Depression of the 1930s.
Before that, economists blamed the Fed for not printing enough money to support the economy as it sank. Bernanke agreed, but found that the scarcity of money could not explain why the depression was so devastating and lasted so long. He discovered that the problem was the collapse of the banking system. Panicked savers took money out of dilapidated banks, which then couldn’t make the loans that kept the economy growing.
“The result,” the Nobel committee wrote, “was the worst global recession in modern history.”
The economics prize capped a week of announcements of the Nobel Prize in medicine, physics, chemistry and literature, as well as the Peace Prize.
They carry a cash prize of 10 million Swedish kronor (nearly $900,000) and will be awarded on December 10.
Unlike the other prizes, the economics prize was not established in Alfred Nobel’s 1895 will but by the Swedish central bank in his memory. The first winner was selected in 1969.