Why is a former president of the FED and two of his colleagues awarded the Nobel Prize in Economics?

First modification: 10/10/2022 – 18:14

The entire world suffered a global financial recession in 2008 and 2009. But Ben Bernanke had to suffer it himself, since he was serving as president of the United States Federal Reserve, perhaps his most important position at that time.

Today, his past research on how to regulate banks and support failing ones with public money to prevent an even deeper economic crisisearned him the 2022 Nobel Prize in Economics, along with two of his colleagues.

Specifically, the Swedish academy honored Bernanke, Douglas Diamond and Philip Dybvig for laying the groundwork for how world powers now deal with global crises.

“The actions taken by central banks and financial regulators around the world to confront two major recent crises, the Great Recession and the economic downturn generated by the Covid-19 pandemic, were largely motivated by the research of the laureates “, wielded the Swedish Academy.

Bank rescue generated criticism in the 2008 crisis

Paradoxically, Bernanke’s award is based on an article published in 1983 in which he analyzes the Great Depression of the 1930s. 23 years later, he would be named chairman of the Federal Reserve. And two years later, he would have to face the Great Recession.

By this time, governments almost everywhere in the world had bailed out the banks, drawing an outpouring of criticism because ordinary consumers suffered and many lost their homes while the main culprits of the crisis were saved.

“But society at large benefited,” the laureates’ research suggests.

“While these bailouts have problems … they could actually be good for society,” Douglas Diamond, a professor at the University of Chicago, argued at a news conference with the Swedish Academy, pointing out that preventing the bank from collapsing Lehman Brothers investment would have made the crisis less severe.

“What happened in 2008 in the United States, which generated a global financial crisis, has a lot to do with unwise behavior on the part of banks and in some cases even crimes, and that was all prosecuted at the time and also generated a change in regulation by the Federal Reserve,” Oriana Montti, an economist and doctoral candidate in international economics at Brandeis University in the United States, told France 24.

Bernanke, now a fellow at the Brooking Institution, argued at the time that there was no legal way to save Lehman, so it was best to let it go bankrupt and use the government’s financial resources to prevent broader systemic failures.

“What Bernanke did was show that banks played a central role in turning relatively small recessions into the depression of the 1930s, and that was the worst economic crisis the world has seen since then,” said Professor John Hassler, a fellow of the committee for the Nobel Prize in Economics.

Bernanke: from theory to practice

Born on December 13, 1953 in Augusta (Georgia), this Harvard University graduate with a doctorate from the Massachusetts Institute of Technology studied the 1930 crisis in depth.

Then, as chairman of the Federal Reserve from 2006 to 2014, he had to deal with the collapse of the housing market and the collapse of large financial institutions.

Diamond, a Nobel for financial crises and the role of banks

He is a researcher at the University of Chicago whose main focus in his award-winning research, carried out with his colleague Dybvig, included a solution to banking vulnerability, in the form of government deposit insurance.

Deposit insurance is a tool provided by governments, which act as a lender of last resort for banks when they are in crisis.

This helps prevent bank runs, which occur when savers start withdrawing their money en masse, leading to the collapse of institutions and putting the entire financial sector at risk.

Dybvig, an expert in banking and corporate finance

He is co-author of a model that explains the importance of banks in the economy and the need to equip themselves with protection mechanisms to face financial crises.

Professor of Banking and Finance at the Olin School of Business of the University of Washington, in Saint Louis, he developed, together with Douglas W. Diamond, a model that shows how banks serve the economy by creating liquidity and how this fact generates crises if not they have no deposit insurance or other protection.

With Reuters, AP and EFE