Ben S. Bernanke, Douglas W. Diamond and Philip H. Dybvig
Eko Hot Blog reports that Ben S. Bernanke, Douglas W. Diamond and Philip H. Dybvig, all of United States (US)-origin, have won the 2022 Nobel Prize in Economics.
The Royal Swedish Academy of Sciences in Stockholm on Monday said the trio won the award “for research on banks and financial crises.”
Bernanke was chairman of the US Federal Reserve from 2006 to 2014. He’s currently at the Brookings Institute in Washington, D.C.
Diamond is a professor at the University of Chicago Booth School of Business, while Dybvig is a professor at the Olin Business School of Washington University in St. Louis.
The Swedish academy said the winners’ discoveries have improved how society deals with financial crises.
“This year’s laureates in the Economic Sciences, Ben Bernanke, Douglas Diamond and Philip Dybvig, have significantly improved our understanding of the role of banks in the economy, particularly during financial crises,” the academy said on the Nobel Prize website.
“An important finding in their research is why avoiding bank collapses is vital.
“Their analyses have been of great practical importance in regulating financial markets and dealing with financial crises.
“For the economy to function, savings must be channelled to investments. However, there is a conflict here: savers want instant access to their money in case of unexpected outlays, while businesses and homeowners need to know they will not be forced to repay their loans prematurely.
“In their theory, Diamond and Dybvig show how banks offer an optimal solution to this problem. By acting as intermediaries that accept deposits from many savers, banks can allow depositors to access their money when they wish, while also offering long-term loans to borrowers.
“However, their analysis also showed how the combination of these two activities makes banks vulnerable to rumours about their imminent collapse. If a large number of savers simultaneously run to the bank to withdraw their money, the rumour may become a self-fulfilling prophecy – a bank run occurs and the bank collapses. These dangerous dynamics can be prevented through the government providing deposit insurance and acting as a lender of last resort to banks.
“Diamond demonstrated how banks perform another societally important function. As intermediaries between many savers and borrowers, banks are better suited to assessing borrowers’ creditworthiness and ensuring that loans are used for good investments.
“Ben Bernanke analysed the Great Depression of the 1930s, the worst economic crisis in modern history. Among other things, he showed how bank runs were a decisive factor in the crisis becoming so deep and prolonged.
“When the banks collapsed, valuable information about borrowers was lost and could not be recreated quickly. Society’s ability to channel savings to productive investments was thus severely diminished.”
“The laureates’ insights have improved our ability to avoid both serious crises and expensive bailouts,” Tore Ellingsen, Chair of the Committee for the Prize in Economic Sciences, added.
The winners of the prize—officially called the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel—will share 10 million Swedish krona ($883,000) equally.
The Economics prize is the last to be announced each year. The prizes for Peace, Chemistry, and Physics were announced last week.
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