(STOCKHOLM, Sweden) – Three American economists, including former Federal Reserve Chairman Ben Bernanke, won this year’s Nobel Prize in Economics for laying the groundwork for world powers to address global crises, such as the recent pandemic or the Great Recession of 2008.
The trio, which also includes Douglas Diamond and Philip Dybvig, won for their research on how regulating banks and supporting failed lenders with public money can avert an even deeper economic crisis, like the Great Depression of the 1930s.
“The actions taken by central banks and financial regulators around the world to deal with two major recent crises – the Great Recession and the economic crisis generated by the COVID-19 pandemic – were largely motivated by the investigations of the laureates,” the Swedish Academy said Monday in announcing the winners.
Governments around the world bailed out banks in 2008 and 2009, drawing an outpouring of criticism as consumers suffered and many lost their homes while banks, among the main culprits in the crisis, were bailed out.
But society at large benefited and the bailouts, while morally questionable to some, likely prevented further pain, the laureates’ research suggests.
“While these bailouts have problems, … they could actually be good for society,” Diamond, a professor at the University of Chicago, told a news conference, arguing that preventing the collapse of investment bank Lehman Brothers would have made the crisis less severe.
“It probably would have been better if Lehman Brothers hadn’t unexpectedly gone under,” Diamond said. “If they had found a way, I think the world would have had a less serious crisis.”
Ironically, Bernanke was the chairman of the US Federal Reserve at the time of the Lehman bankruptcy in 2008, which became one of the main catalysts for the world’s biggest financial turmoil since the 1930s.
Bernanke, now a fellow at the Brooking Institution, argued then that there was no legal way to save Lehman, so it was best to let it go bankrupt and use the government’s financial resources to avoid broader systemic failures.
Part of that response, including ultra-low interest rates and massive asset purchases by central banks, is being reversed now that inflation is at its highest level in nearly half a century in many parts of the world.
The trio’s work also has implications for the current economic turmoil, as interest rates rise at a record pace to fight inflation amplifying recession risks that will inevitably put the financial sector in check.
“Some households and some businesses are already weakened,” said Gernot Doppelhofer, a professor at the Norwegian School of Economics.
“This research shows how the financial system can amplify shocks and how important it is to try to stabilize the economy while ensuring the stability of the financial system,” he added.
Bank runs can easily become a self-fulfilling prophecy leading to the collapse of an institution and putting the entire financial sector at risk.
“Ben Bernanke, in a 1983 article, demonstrated with statistical analysis and historical sources that bank runs led to bank failures and that this was the mechanism that turned a relatively ordinary recession into the depression of the 1930s, the crisis most dramatic and serious thing we’ve seen in modern history,” said John Hassler, a member of the Nobel Prize committee for economics.
Most of the previous honorees have been from the United States. Only two women have been awarded, Elinor Ostrom in 2009 and Esther Duflo in 2019.
The economics prize is not one of the original five prizes created in the 1895 will of industrialist and inventor of dynamite Alfred Nobel.
The award was created by the Central Bank of Sweden and was first awarded in 1969, under the full and formal name of the Bank of Sweden Prize for Economic Sciences in Memory of Alfred Nobel.
