Former Fed Chairman Ben Bernanke shares Nobel prize for banking research

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Former US Federal Reserve Chairman Ben Bernanke, who used his academic expertise on the Great Depression to help revive the US economy after the 2007-2008 financial crisis, won the Nobel Prize in Economics with two other American economists for their research on the fallout from bank failures.

Bernanke was recognized Monday along with Douglas W. Diamond and Philip H. Dybvig. The Nobel panel at the Royal Swedish Academy of Sciences in Stockholm said the trio’s research had shown “why avoiding bank failures is vital”.

With their discoveries in the early 1980s, the laureates laid the foundations for the regulation of financial markets, the panel said.

“Financial crises and depressions are sort of the worst thing that can happen to economics,” said John Hassler of the Economics Prize Committee. “These things can happen again. And we need to understand the mechanism behind these and what to do about it. And this year’s winners provide that.

Bernanke, 68, now at the Brookings Institution in Washington, examined the Great Depression of the 1930s, showing the danger of bank runs – when panicked people withdraw their savings – and how bank meltdowns led to widespread economic devastation. Prior to Bernanke, economists viewed bank failures as a consequence, not a cause, of economic downturns.

Diamond, 68, based at the University of Chicago, and Dybvig, 67, who is at Washington University in St. Louis, showed how the government guarantees deposits and can prevent a spiral of financial crises. In 1983 they co-wrote “Bank Runs, Deposit Insurance, and Liquidity”, which dealt in part with the damage caused by bank runs.

Diamond said the Nobel Prize came as a surprise. On Monday morning, he said: “I was sleeping very soundly and then all of a sudden my cell phone went off” with good news from the Nobel committee.

Regarding the global economic turmoil created by the COVID-19 pandemic and Russia’s war in Ukraine, Diamond said the financial system is “much, much less vulnerable” to crises due to memories of the collapse. of the 2000s and improved regulation.

“The problem is that these vulnerabilities of fear of leaks, dislocations and crises can appear anywhere in the financial sector. It doesn’t have to be commercial banks,” he said.

The trio’s research gained real-world prominence when investors panicked the financial system in the fall of 2008.

Bernanke, then Fed chief, teamed up with the US Treasury Department to support big banks and ease the credit crunch, the engine of the economy.

He cut short-term interest rates to zero, led the Fed’s purchases of Treasuries and mortgage investments, and implemented unprecedented lending programs. Collectively, these measures have calmed investors and strengthened the big banks.

They also pushed long-term interest rates to historic lows and drew strong criticism of Bernanke, particularly from some 2012 Republican presidential candidates who said the Fed was hurting to the value of the dollar and risked triggering inflation later.

The Fed’s actions under Bernanke have extended central bank authority into unprecedented territory. They couldn’t prevent the longest and most painful recession since the 1930s. But in hindsight, the Fed’s actions have been credited with saving the banking system and averting another depression.

And Bernanke’s Fed set a precedent for the central bank to respond quickly and forcefully to economic shocks.

When COVID-19 hit the US economy in early 2020, the Fed, under Chairman Jerome Powell, quickly cut short-term interest rates to zero and pumped money into the financial system. . The aggressive intervention – accompanied by massive government spending – quickly ended the downturn and sparked a powerful economic recovery.

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But the quick comeback has also come at a cost: Inflation began to rise rapidly last year and is now near 40-year highs, forcing the Fed to reverse course and raise rates to cool the economy. Central banks around the world are also taking action as inflation erodes consumers’ purchasing power.

In a groundbreaking 1983 article, Bernanke explored the role of bank failures in deepening and lengthening the Great Depression of the 1930s.

Before that, economists blamed the Fed for not printing enough money to support the economy as it sank. Bernanke agreed but found that lack of money could not explain why the Depression was so devastating and lasted so long. The problem, he discovered, was the collapse of the banking system. Panicked savers withdrew money from failing banks, which then could not provide the loans that allowed the economy to grow.

“The result,” the Nobel committee wrote, “was the worst global recession in modern history.”

The economics prize capped a week of announcements of Nobel prizes in medicine, physics, chemistry and literature as well as the peace prize.

They carry a cash prize of 10 million Swedish crowns (nearly $900,000) and will be awarded on December 10.

Unlike other prizes, the Economics Prize was not created in Alfred Nobel’s will of 1895 but by the Swedish central bank in his memory. The first winner was selected in 1969.

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