"The Nobel Memorial Prize in Economic
Sciences was awarded on Monday
to Ben S. Bernanke, the former Federal Reserve chair, and two other academics
for research into banks and financial crises.
Douglas W. Diamond, an economist at
the University of Chicago, and Philip H. Dybvig at Washington University in St.
Louis won the prize alongside Mr. Bernanke, who is now at the Brookings
Institution in Washington.
Mr. Bernanke in 1983 wrote a paper that broke ground in explaining that
bank failures can propagate a financial crisis rather than simply being a
result of the crisis.
Mr. Diamond and Mr. Dybvig the same year wrote a paper on the risks inherent
in maturity transformation, the process of turning short-term borrowing into
long-term lending. Mr. Diamond also wrote about how banks monitor their
borrowers, noting that knowledge about borrowers disappears upon bank failures,
extending the consequences of the upheaval.
“The laureates have provided a
foundation for our modern understanding of why banks are needed, why they’re
vulnerable, and what to do about it,” said John Hassler, an economist at the
Institute for International Economic Studies at Stockholm University and a
member of the prize committee.
Mr. Diamond spoke by phone at the
news conference announcing the prize. Asked whether he had any warnings for
banks and governments today, at a time when markets have been in turmoil as
central banks around the world raise interest rates to fight rapid inflation,
Mr. Diamond said that financial crises become worse when people begin to lose
faith in the stability of the system.
“In periods when things happen
unexpectedly — like, I think many people are surprised how rapidly nominal
interest rates have gone up around the world — that can be something that sets
off fears in the system,” he said. “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.”
But he added that the world is
better prepared for any financial upheaval now than it was during the financial
crisis in 2008, because “recent memories of that crisis” and regulatory
improvements have made the banking system less vulnerable. He noted, however,
that the vulnerabilities that he and Mr. Dybvig have identified extend beyond
banks, and can bubble up in other parts of the financial system, like insurance
firms or mutual funds.
The economics award, among the
highest honors in the field, is not, technically, a Nobel Prize. It is called
the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel
because it wasn’t among the original categories that Alfred Nobel set out in
his will in 1895. It is funded by Sweden’s central
bank and has been given out only since 1969,
though the Nobel committee promotes it and lists it on its website.
Ben S. Bernanke, the former chair of
the Federal Reserve, on Monday won a Nobel Memorial Prize in economics for his
research into banks and financial crises — work he was able to draw on in real
time while fighting the worst downturn America had faced since the Great
Depression.
Mr. Bernanke became Fed chair
in 2006, shortly before U.S. house prices ended their breakneck ascent and began an
unexpected and devastating decline. As the housing market cooled, overextended
borrowers fell behind and defaulted on their mortgages, and a pile of risky
mortgage debt that had been sliced, diced and parceled out across big banks and
the broader financial system began to drag down institutions and break the
gears of finance.
Mr. Bernanke, who received a Ph.D.
in economics from the Massachusetts Institute of Technology and who taught at
Princeton University before coming to the Fed as a governor in 2002, drew upon
his research about the Great Depression to try to stem the fallout. He worked
with colleagues to set up emergency programs that backstopped various markets
on the brink of collapse, from short-term business debt to securitized loans.
And alongside the Treasury Department, he used the Fed’s powers to enable bailouts for bank and insurance company
portfolios.
Mr. Bernanke’s track record on the
crisis included controversy. The Fed and Treasury Department allowed Lehman
Brothers to fail, which Mr. Bernanke has said he and his colleagues believed
was their only option. Some critics have since
argued that the investment bank could and should have been
saved. The ripple effects of that failure worsened the downturn,
which lasted from 2007 to 2009 in the United States and sent activity tumbling
around the world.
But the Fed acted aggressively to
try to resuscitate the economy. Under Mr. Bernanke’s watch, it began to
implement bond-buying policies in which it purchased huge amounts of
government-backed debt to lower long-term interest rates. It also pushed toward
greater transparency, beginning to hold quarterly news conferences (which now
accompany every rate-setting meeting) and formally adopting an inflation target
of 2 percent.
Mr. Bernanke left the Fed in 2014
and he is now a distinguished senior fellow at the Brookings Institution in
Washington. He won the Nobel for his work on financial crises, including a 1983 paper that broke ground in
explaining that bank failures propagate downturns and aren’t simply a side
effect of them.
Diamond and Dybvig created an influential model about the
dynamics of bank runs.
Douglas W. Diamond and Philip Dybvig
have had enormously successful academic careers studying how things can go
wrong with banks, and much of their work stems from a highly influential paper
they wrote nearly 40 years ago, early in their careers.
The paper showed how banks create
liquidity in the economy, and how this liquidity subjects banks to sudden,
panicked withdrawals by customers if there is no deposit insurance or other
protection.
It is “one of the most widely cited
papers in finance and economics,” the University of Washington at St. Louis,
where Mr. Dybvig is an economics professor, wrote in a statement.
The two economists developed the Diamond-Dybvig model
showing that deposits used to finance business loans may be unstable and give
rise to bank runs. Banks may need a government safety net, like deposit
insurance, more than borrowers do.
This topic — how banks work, and how
they can slip up, causing broad problems — continues to be relevant. In a video posted in 2019
by the Center for Economic Policy Research, Mr. Diamond described how, just
before the financial crisis, there was a drastic increase in the number of
loans that did not include covenants to help ensure the money would be paid
back.
Researchers, he said, were looking
into “why, in a boom period, just before the crisis,” was there so little
incentive to be careful.
Mr. Diamond, who was born in 1953,
has taught at the University of Chicago since 1979. “His research agenda for
the past 40 years has been to explain what banks do, why they do it and the
consequences of these arrangements,” the university said in a
statement.
As an undergraduate he attended
Brown University, earning a bachelor’s degree in economics, followed by
master’s and doctorate degrees in economics at Yale.
He continues to teach at Chicago’s
Booth School of Business, including a graduate course in corporate finance. He
has previously taught as a visiting professor at the M.I.T. Sloan School of
Management, the Hong Kong University of Science and the University of Bonn.
Before arriving at Washington
University, Philip H. Dybvig, 67, taught at Yale and Princeton. He has published
two textbooks.
Mr. Dybvig was raised in Dayton,
Ohio, and attended Indiana University, earning a bachelor’s degree in math and
physics. He later received a doctorate in economics at Yale, where he became a
tenured professor.
“I have always worked on a wide
range of topics,” he says on his university bio page. “My recent work includes
work on the anti-corruption campaign in China, preservation of capital for
educational endowments, and predictability of stock returns.”"
