The Swedish Academy of Sciences has awarded this Monday the former chairman of the Federal Reserve and researcher at the Brookings Institute, Ben Bernanke, the professor at the University of Chicago Douglas W. Diamond and Philip H. Dybvig, from Washington University, with the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel 2022, known as the Nobel Prize in Economics. The award has been granted “for his research in banking and financial crises”, as announced by the Swedish Academy.
Lehman Brothers, the fourth largest investment bank in the United States, declared bankruptcy on Monday, September 15, 2008. This massive earthquake was felt in all corners of the world economy, which suffered an extraordinary financial crisis. Ben Bernanke (Augusta, Georgia, 68 years old) then sat in an armchair that gave him a complete overview of the disaster. A student of the Great Depression, between 2006 and 2014 he was the president of the Federal Reserve, which also makes him the best known face of the three winners.
The 2008 crisis, the starting point of the Great Recession, demonstrates the need to know the ins and outs of the financial system, full of vulnerabilities. And the Swedish Academy points out that Bernanke, Diamond (68 years old) and Dybvig (Dayton, Ohio, 66 years old) laid the foundations of that research in the early 1980s. “His analyzes have been of great practical importance in regulating financial markets and dealing with financial crises,” the institution said in a statement.
The research of the three winners is based on the fundamental role of banks in channeling citizens’ savings towards investment. To do this, financial institutions must overcome the conflict between the need of depositors to immediately access their savings and that of those who receive a loan, who require time to repay the capital. And while, in general, banking offers a solid solution through massive savings, Diamond and Dybvig show that banking is also very vulnerable. A simple rumor is enough for this system to collapse: if a large number of clients simultaneously withdraw their money from the bank, the entity can end up collapsing. There, both authors point out that the public sector can establish firewalls by guaranteeing deposits or acting as a lender of last resort.
The Swedish Academy has also recognized Bernanke’s research on the Great Depression of the 1930s. His work explains the consequences of the banking panic, which he showed was a decisive factor in making the crisis so long and deep. Previously, economists believed that bank failures were merely a consequence of the recession. Bernanke showed that these bankruptcies went further, since they broke that connection between savers and borrowers. That supposed a contraction of the investment and, therefore, of the economy.
Although this award is known as the Nobel, it was actually born at the initiative of the Bank of Sweden in 1968 to commemorate the 300 years of the institution. In fact, that category was not among the five that Alfred Nobel left in his will: Physics, Chemistry, Literature, Medicine and Peace. Even so, it has ended up becoming popular as one more. Once again, the prize falls to three North Americans, who already win more than half of the awards. And again it leaves out women, who have only accessed it twice.
Last year, the Academy awarded Canadian David Card, American-Israeli Joshua Angrist, and Dutch-American Guido Imbens for their “empirical contributions in the field of labor economics,” including refuting the widely held notion that a rise in the minimum wage always leads to job losses.
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