based on own work
Why a central banker gets the Nobel Prize
10/10/2022, 6:24 p.m
During the global economic crisis of 2008, Ben Bernanke was at the helm of the world’s most important central bank. As a scientist, he had partly developed the theoretical basis for his own work himself. However, one of his co-prizewinners is not entirely satisfied with the practical implementation.
With few exceptions, the winners of the Nobel Prize in Economics are male, American professors whose groundbreaking research dates back several years. In this regard, economist Ben Bernanke, one of this year’s recipients of the Memorial Alfred Nobel Prize in Economics, is a typical recipient. Unlike his colleagues Douglas Diamond and Philip Dybvig, who also received awards, and most of his predecessors, Bernanke is not only known in the professional world. As President of the world’s most important central bank, the American Federal Reserve, the 68-year-old was one of the most powerful men in the financial world from 2006 to early 2014. During this time he steered the USA and the world economy through the global financial crisis, which culminated in the bankruptcy of the US bank Lehman Brothers in 2008.
It was the worst economic crisis since the Great Depression of the 1930s – the very crisis that Bernanke had previously made a name for himself in the academic world for studying. It is for this research, which also formed the basis of his crisis management as Fed chairman, that Bernanke is now receiving the prestigious award.
As a researcher, Bernanke has shown how the rush of customers to banks to withdraw their savings turned a relatively ordinary recession in the 1930s into a serious crisis with dramatic consequences worldwide, explained the Swedish economist John Hassler from the responsible Nobel Committee at the announcement. In particular, it was appreciated that Bernanke used historical sources and statistical methods to analyze which factors played a role in the slump in gross domestic product. In doing so, he clearly worked out that collapsing banks had played the largest part in the downturn.
“This dangerous dynamic can be prevented by the government providing deposit insurance and acting as lender of last resort for banks,” Hassler said. “He showed that banks have to be there.” Without them, the economy would function far less well. Accordingly, under Bernanke’s leadership, the Fed provided gigantic sums to ensure the functioning of the financial sector in the crisis.
Only properly regulated banks are stable banks
Diamond, a professor at the University of Chicago, and Dybvig, a professor at Washington University in St. Louis, were honored for developing theoretical models of the role of banks in society. They had explained how “banks offer an optimal solution” to convert savings into investments, the academy explained. At the same time, they had shown how banks would be vulnerable to rumors about their impending collapse.
“In short, the theory is that banks can be very useful, but are only stable if they are properly regulated,” said committee chair Tore Ellingsen. The insights of this year’s award winners “have enhanced our ability to avoid both major crises and costly bailouts.” With their findings, Bernanke, Diamond and Dybvig laid the foundations for modern banking research in the early 1980s. “Your analyzes have been of great practical importance in regulating the financial markets and dealing with financial crises,” emphasized the Academy.
In retrospect, however, the newly crowned Nobel Prize winner Diamond is not entirely satisfied with how her theory was put into practice during the 2008 crisis under the decisive leadership of Bernanke. Diamond was hooked up by phone for the Nobel Committee press conference. He emphasized that in retrospect it would have been better if the bank Lehman Brothers had not unexpectedly gone bankrupt, but had been rescued by the state.
The regulators wanted to prove that they could take tough action. But from his point of view it would have been better to be more accommodating and not let the bank suddenly go bankrupt. If the regulators had chosen a better solution despite the legal difficulties, the world economy would probably have been spared worse. Lehman Brothers collapsed in September 2008, surprising many observers, thereby accelerating the world’s biggest financial crisis since the 1930s.