A former US Federal Reserve Chief, Ben Bernanke, is one of three recipients of this year’s Nobel prize in economics.
Mr Bernanke is known to have led the US central bank during the 2008 financial crisis. The Royal Swedish Academy of Sciences indicated that it was recognising Mr Bernanke along with two colleagues for research that had changed peoples understanding of financial crises which focused on the importance of avoiding runs on banks.
The Academy noted that the insights have “improved our ability to avoid both serious crises and expensive bailouts”.
Economist, John Hassler, from the Stockholm University and a member of the prize committee explained that the “laureates have provided a foundation for our modern understanding of why banks are needed, why they are vulnerable and what to do about it”.
Prof Hassler stated that understanding financial crises remains a “first-order priority”.
“We can also note that even though the financial crisis had large consequences, neither that, nor the Covid pandemic, led to depressions like in the ’30s.”
Ben Bernanke
Mr Bernanke’s research revealed how bank runs had prolonged the Great Depression in the 1930s. He later applied some of those lessons during his time at the US Federal Reserve, which he led from 2006-2014.
Economists honoured with Nobel Prize
When the financial crisis hit, Mr Bernanke pushed the Federal Reserve to intervene aggressively, slashing interest rates and helping to organise bailouts of some of America’s biggest banks – moves that were politically controversial.
The tools he deployed were also used by the Fed and other central banks in 2020 to stabilise the economy when the Covid pandemic hit and many countries went into lockdown.
When Mr Bernanke published his work in 1983, bank failures were viewed as a consequence of economic crisis, rather than the cause. His work turned that wisdom on its head.
Mr Bernanke shares the prize with economists Douglas Diamond and Philip Dybvig. Their work showed the vital role banks play in the economy and how regulation, such as deposit insurance, can make banks less vulnerable to collapse, insights that the committee said “form the foundation of modern banking regulation”.
Prof Diamond, who teaches at the University of Chicago, highlighted that the world is much better prepared for financial crises than it was in 2008. However, he revealed that the unexpected events, like the surge in borrowing costs that hit the UK last month after the government unveiled plans for tax cuts, still pose risks, especially if people lose faith in the credibility of the system.
“The best advice is to be prepared for making sure that your part of the banking sector is both perceived to be healthy and to stay healthy and respond in a measured and transparent way to changes in monetary policy.”
Douglas Diamond
Prof Diamond emphasized that the recognition came as a surprise and that he had been “sleeping very soundly” when his mobile rang, informing him of his win.
The award comes with $885,000 in prize money, which will be split three ways. Although not one of the original Nobel Prizes, the economics award is administered by the Nobel Foundation and is the last to be announced each year.
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