Trio earn Nobel Prize for research on bank failures
Former Fed Chair Bernanke among US-based winners in economic sciences
Associated Press
STOCKHOLM — Former U.S. Federal Reserve Chair Ben Bernanke, who put his academic expertise on the Great Depression to work reviving the American economy after the 2007-2008 financial crisis, won the Nobel Prize in economic sciences along with two other U.S.-based economists for their research into bank failures.
The Nobel panel at the Royal Swedish Academy of Sciences recognized Bernanke, Douglas Diamond and Philip Dybvig on Monday for research that shows “why avoiding bank collapses is vital.”
Their findings in the early 1980s laid the foundations for regulating financial markets, the panel said.
“Financial crises and depressions are kind of the worst thing that can happen to the economy,” said John Hassler of the Committee for the Prize in Economic Sciences. “We need to have an understanding of the mechanism behind those and what to do about it. And the laureates this year provide that.”
As a professor at Stanford University, Bernanke, 68, examined the Great Depression of the 1930s, showing the danger of bank runs — when panicked people withdraw their savings — and how bank collapses led to widespread economic devastation. He was Fed chair from early 2006 to early 2014 and is now with the Brookings Institution in Washington.
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.
“Probably the most gratifying thing for us is that policymakers actually seem to understand it, and the insights that we had, which are pretty simple, could be used in the actual financial crisis,” Diamond said.
The trio’s research took on real-world significance when investors sent the financial system into a panic during fall 2008, prompting the longest and most painful recession since the 1930s.
Bernanke, then head of the Fed, teamed up with the U.S. Treasury Department to prop up major banks and ease a shortage of credit.
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 — and were credited with avoiding another depression.
The Fed also pushed long-term interest rates to historic lows, which led to fierce criticism of Bernanke, particularly from some 2012 Republican presidential candidates who said the Fed was hurting the value of the dollar.
Bernanke’s unprecedented activism at the Fed established a precedent for the central bank. When COVID-19 slammed the U.S. economy in early 2020, the Fed, under Chair Jerome Powell, quickly cut short-term interest rates back to zero and pumped money into the financial system. That — along with massive government spending — triggered a powerful recovery.
I wrote a 20+ page paper about the savings and loan crisis during the 80's. They were caused by combinations of insufficient reserves, poor real estate lending practices and "sweetheart" deals too/looting by executives- just in case you see any parallels here... which is the issue of understanding and preventing bank runs...
