In November 2022, the three United States-based economists share the 2022 Sveriges Riksbank Prize in Economic Sciences receive the award for demonstrating the importance of preventing widespread bank collapses, particularly during financial crises.
Ben Bernanke, a former professor at Harvard University and now at the Brookings Institution, shares the prize equally with Chicago Booth professor Douglas Diamond and Philip Dybvig, professor at Washington University in St. Louis, for decades of work that laid the foundations of research into why nations have banks, how to make them less vulnerable in crises, and how bank collapses exacerbate financial crises.
In an article for the Lindau Nobel Foundation, I looked at how the Laureates’ contribution to the economics profession’s understanding of the role of banks in financial crises came through two discrete routes.
Bernanke analysed the Great Depression of the 1930s, the worst economic crises in modern history. In his classic 1983 paper in the American Economic Review, “Nonmonetary Effects of the Financial Crises in the Propagation of the Great Depression”, Bernanke explained why a mild recession in the United States in late 1929 turned into the Great Depression of the 1930s.
He showed that bank runs were a decisive factor in the crises becoming so deep and prolonged. When the banks collapsed, valuable information about borrowers was lost and could not be recreated quickly. Economic’s ability to channel savings to productive investments was thus severely diminished.
In the same year, Diamond and Dybvig published their seminal piece in the Journal of Political Economy, “Bank Runs, Deposit Insurance, and Liquidity”, that led to the development of the theoretical Diamond-Dybvig model which explains how banks create liquidity for savers while borrowers can access long-term financing.
Diamond and Dybvig also presented a solution to the problem of bank vulnerability in the form of deposit insurance from the government. When depositors know that the state has guaranteed their money, they no longer need to rush to the bank as soon as rumours start about a bank run. This stops a bank run before it starts.
Bernanke’s scholarship in Great Depression economics was seen as key to his handling of the 2008/09 global financial crisis when he was the chairman of the US Federal Reserve board. When the Covid-19 pandemic hit in 2020, the Laureates’ insights played an important role in supporting the significant measures policymakers took to ensure that the impact on financial markets did not develop into a new depression.
Bernanke’s scholarship in Great Depression economics was seen as key to his handling of the 2008/09 global financial crisis when he was the chairman of the US Federal Reserve board. When the Covid-19 pandemic hit in 2020, the Laureates’ insights played an important role in supporting the significant measures policymakers took to ensure that the impact on financial markets did not develop into a new depression.
the committee was clear that timeliness of the issues surrounding bank collapses was not a relevant factor in making their decision on the award. “It’s true that it is very timely. That, of course, is nothing that we are unhappy with, but it was not the reason for giving the prizes,” Professor John Hassler, a member of the prize committee, said.
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