Bernanke, Diamond and Dybvig will receive the Nobel Prize in Economics for their work on financial crises


Economists Ben S. Bernanke, former Chairman of the US Federal Reserve, Douglas W. Diamond and Philip H. Dybvig received the Bank of Sweden Prize for Economic Sciences in Memory of Alfred Nobel, popularly known as the Nobel Prize in Economics, the Royal Swedish Academy of Sciences announced on Monday.

The organization highlighted the awarding of the prize to the three experts “for their research on banks and financial crises”, which was crucial to improving our understanding of banks, banking regulation, banking crises and how financial crises should be handled. The research presented by the winners highlights the fact that it helps to reduce the risk that financial crises turn into long-lasting depressions with serious consequences for society.

Specifically, Bernanke analyzed the “Great Depression” of the 1930s, the worst economic crisis in modern history, and showed how bank runs or financial panics were a decisive factor in making the crisis so deep and prolonged. Using historical sources and statistical methods, the “bearded professor” (as he is nicknamed) showed which factors were important in the fall in GDP and how those directly linked to failing banks explained most of the recession.

Whereas, Douglas Diamond and Philip Dybvig they have developed theoretical models that explain why banks exist and how their role in society makes them vulnerable to rumors of impending collapse and how society can help reduce this vulnerability. To deal with this, they both proposed official deposit insurance. So that, faced with a financial collapse, depositors know that the State guarantees their savings and that they no longer need to run to the bank to withdraw their money. Diamond also demonstrated another important function of banks: as intermediaries between savers and borrowers, they are better equipped to assess the latter’s creditworthiness and ensure that loans are used for good investments.

The architect of the biggest monetary expansion to date

Bernanke succeeded Allan Greenspan as chairman of the Federal Reserve in 2006, just before the subprime mortgage crisis that gave rise to the financial crisis hit. His mandate, which took place during part of the governments of George W. Bush and Barack Obama, lasted until early 2014, when he gave way to Janet Yellen, the first woman to head the world’s largest central bank. Under his leadership came the biggest monetary expansion yet to deal with the biggest crisis since 29, with interest rates slashed to historic lows and massive debt buying. A strategy that was subsequently maintained and imitated by other central banks to curb the effects of the covid-19 pandemic on the economy.

The Nobel Prize in Economics it is not part of Alfred Nobel’s legacy, as it was established in 1968 by the Riksbanken, the Swedish central bank, coinciding with the 300th anniversary of the entity, and was awarded for the first time in 1969, in honor of the Norwegian Ragnar Frisch and the Dutchman Jan Tinbergen. The total prize money amounts to a total of 10 million Swedish crowns (914,000 euros). The prize is the latest of the Nobel Prizes announced, after announcing the winners in the Medicine, Physics, Chemistry, Literature and Peace categories last week and will be awarded, like the others, on December 10.

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