The trio are honored to have “significantly improved our understanding of the role of banks in the economy, particularly during financial crises, as well as how to regulate financial markets”.
A US trio including former Federal Reserve chief Ben Bernanke, who played a key role in tackling the 2008 financial crisis, has won the Nobel Prize in Economics for research on banking in turbulent times.
Bernanke, along with Douglas Diamond and Philip Dybvig, were honored on Monday for having “significantly improved our understanding of the role of banks in the economy, particularly during financial crises, as well as how to regulate financial markets”, said the jury.
Bernanke, 68, has been credited with spurring the recovery from the 2008 recession and pilloried by critics for doing little to avert it, allowing investment bank Lehman Brothers to collapse.
He received the award for his analysis, conducted in the early 1980s, of the Great Depression of the 1930s, the worst economic crisis in modern history.
In particular, Bernanke showed “how failing banks played a decisive role in the global depression”, making the downturn “not only deep, but also lasting”, noted the Nobel jury.
In his role as central bank chief, Bernanke “was able to put research insights into policy,” during the 2008-09 financial crisis, the Nobel committee said.
Bernanke was hailed for the Fed’s unorthodox response of cutting interest rates and flooding the financial system with liquidity.
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Diamond, a University of Chicago professor born in 1953, and Dybvig, 67, a professor at Washington University in St. Louis, were honored for showing how “banks offer an optimal solution” to channeling the savings to investments by acting as an intermediary.
The pair also showed how vulnerable these institutions were to so-called bank runs.
“If a large number of savers simultaneously rush to the bank to withdraw their money, the rumor may become a self-fulfilling prophecy – a bank run occurs and the bank collapses,” the Nobel committee said.
The committee added that this dangerous dynamic can be avoided if governments provide deposit insurance and give banks a lifeline by becoming a lender of last resort.
“The winners’ ideas have improved our ability to avoid both severe crises and costly bailouts,” said Tore Ellingsen, chair of the economics prize committee.
“In a nutshell, the theory says that banks can be extremely useful, but their stability is only guaranteed if they are properly regulated,” he added.
Diamond, speaking to reporters after the announcement, spoke on Monday about the decision by US authorities not to bail out US investment bank Lehman Brothers, as they later did for other financial institutions.
The bank’s collapse sent shock waves through financial markets when it filed for bankruptcy in September 2008.
“It would have been better to find a more accommodating, less unstable and unexpected way to resolve Lehman Brothers,” Diamond said, pointing out that there were questions about what regulators were legally allowed to do at the time.
“If they had found a way, I think the world would have had a less severe crisis than it did,” Diamond said.
The prize is accompanied by a medal and a sum of approximately $900,000 (10 million Swedish crowns).
Winners will receive the King Carl XVI Gustaf Prize at an official ceremony in Stockholm on December 10, the anniversary of the death in 1896 of the scientist Alfred Nobel who created the prizes in his last will.
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Source: TRTWorld and agencies