# Banking crisis breakthroughs win Nobel economics prize for Bernanke, Diamond, Dybvig
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-10-10
Category: NEWS
Category URL: https://financedigest.com/category/news
Meta Title: Nobel Economics Prize Winners & Global Economic Crises
Meta Description: Discover how their groundbreaking research on bank regulation and bailouts shaped responses to global financial crises, including the Great Recession and the
URL: https://financedigest.com/banking-crisis-breakthroughs-win-nobel-economics-prize-for-bernanke-diamond-dybvightml

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By Simon Johnson and Johan Ahlander

STOCKHOLM (Reuters) – A trio of U.S. economists including [former Federal Reserve Chair Ben Bernanke won this year’s](https://www.financedigest.com/death-of-former-pope-benedict-overshadows-new-year-at-vatican.html "Death of former Pope Benedict overshadows New Year at Vatican") Nobel Economics Prize on Monday for laying the foundation of how world powers now tackle global crises like the recent pandemic or the Great Recession of 2008.

The trio, who also include Douglas Diamond and Philip Dybvig, won for their research on how [regulating banks](https://www.financedigest.com/exclusive-u-s-regulator-seeks-sale-of-silicon-valley-bank-signature-bank-portfolios-sources.html "Exclusive-U.S. regulator seeks sale of Silicon Valley Bank, Signature Bank portfolios-sources") and propping up failing lenders with public cash can stave off an even deeper economic crisis, such as the Great Depression of the 1930s.

The actions taken by central [banks and financial regulators](https://www.financedigest.com/swiss-regulator-monitoring-banks-and-insurers-after-svb-collapse.html "Swiss regulator monitoring banks and insurers after SVB collapse") around the world in confronting two recent major crises – the Great Recession and the economic downturn that was generated by the COVID-19 pandemic – were in large part motivated by the laureates’ research,” the Swedish Academy said in announcing this year’s prize winners.

Governments around the world bailed out banks in 2008 and 2009, generating a torrent of criticism as ordinary [consumers suffered with many losing their homes even as banks](https://www.financedigest.com/30-per-cent-of-uk-consumers-would-use-amazon-google-facebook-or-apple-for-banking-services.html "30 Per Cent of UK Consumers Would Use Amazon, Google, Facebook or Apple for Banking Services"), a key culprit of the crisis, were saved.

But society on the whole benefited and the bailouts, even if morally questionable to some, likely prevented more pain, the laureates’ research suggests.

“Even though these bailouts have problems, … they could actually be good for society,” Diamond, a University of Chicago professor, told a news conference with the Swedish Academy, arguing that preventing the collapse of investment [bank Lehman Brothers would have made the crisis](https://www.financedigest.com/how-the-2023-banking-crisis-unfolded.html "How the 2023 banking crisis unfolded") less severe.

It probably would have been better if [Lehman Brothers](https://www.financedigest.com/lehman-brothers-trader-to-fintech-billionaire-revoluts-nikolay-storonsky.html "Lehman Brothers trader to fintech billionaire: Revolut’s Nikolay Storonsky") had not collapsed unexpectedly,” Diamond said. Had they found a [way I think the world would have had less of a severe crisis.”](https://www.financedigest.com/5-ways-to-support-your-employees-during-the-cost-of-living-crisis.html "5 ways to support your employees during the cost of living crisis ")

Ironically Bernanke was the chair of the U.S. Federal Reserve at the time of Lehman’s collapse in 2008, which became one of the main catalysts of the [world’s biggest](https://www.financedigest.com/biggest-economy-in-the-world.html "Biggest Economy in the World") financial turmoil since the 1930s.

Bernanke, now a fellow at the Brooking Institution, argued at the time that there was no legal way to save Lehman so the next best [thing was to let it fail and use the government’s financial](https://www.financedigest.com/why-banks-could-stand-to-learn-a-thing-or-two-about-financial-inclusion-from-fintechs.html "Why banks could stand to learn a thing or two about financial inclusion from fintechs") resources to prevent wider systemic failures.

Part of that response, including ultra low interest rates and massive central bank asset [buys are being reversed now as inflation is at its highest level in around a half](https://www.financedigest.com/over-half-of-britons-say-loyalty-cards-encourage-them-to-buy-a-product-niq.html "Over half of Britons say loyalty cards encourage them to buy a product – NIQ") a century in many parts of the world.

The trio’s work also has implications for the current [economic turmoil as raising interest rates at a record pace to fight inflation amplifies recession](https://www.financedigest.com/hotel-investors-should-they-be-worried-about-a-potential-economic-pause-delving-into-inflation-interest-rates-recession-etc.html "‘Hotel Investors – should they be worried about a potential economic pause?’ delving into inflation, interest rates, recession etc") risks that will inevitably challenge the financial sector.

“Some households and some firms are already weakened,” Gernot Doppelhofer, professor at the economics department of the Norwegian School of Economics (NHH) said.

This research shows how the [finance system can amplify shocks and how it’s important to try to stabilise the economy while also ensuring the stability of the financial](https://www.financedigest.com/g7-finance-leaders-pledge-financial-stability-supply-chain-diversity.html "G7 finance leaders pledge financial stability, supply chain diversity") system,” he added.

[BANK RUNS](https://www.financedigest.com/could-the-cashless-society-mean-the-end-of-the-classic-bank-run.html "Could the ‘cashless society’ mean the end of the classic bank run? ")

What Bernanke did was to show that [banks played a central role in turning relatively small recessions](https://www.financedigest.com/banking-turmoil-means-recession-fears-are-creeping-back.html "Banking turmoil means recession fears are creeping back") into the depression in the 30s, and that was the worst economic crisis that the world has seen ever since,” John Hassler, professor of economics and a member of the Nobel Prize for Economics committee, said.

Bank runs can easily become self-fulfilling leading to the collapse of an [institution and putting the entire financial sector at risk](https://www.financedigest.com/institutional-investors-back-shell-board-lawsuit-over-climate-risk.html "Institutional investors back Shell board lawsuit over climate risk").

Dybvig, a professor at Washington University in St. Louis, and Diamond argued that banks taking [short-term deposit and lending this cash out in the long term is the most efficient way for the financial sector to operate](https://www.financedigest.com/ubisoft-vows-to-get-back-to-operating-margin-above-20-in-medium-term.html "Ubisoft vows to get back to operating margin above 20% in medium term").

But such an arrangement also made them prone to runs. [Risks would then be reduced via “delegated monitoring” where banks](https://www.financedigest.com/stocks-rise-after-bank-sale-fuels-investor-risk-appetite.html "Stocks rise after bank sale fuels investor risk appetite") act as intermediaries between savers and borrowers.

This spreads [risks and ensures efficiency as banks](https://www.financedigest.com/governments-and-central-banks-risk-inflation-bank-of-england-has-done-its-bit-now-the-politicians-turn.html "Governments and central banks risk inflation, Bank of England has done its bit, now the politicians’ turn") are better suited to assess creditworthiness and monitor the use of funds, the Academy said.

The three economists will receive an equal share of the 10 million [Swedish crown](https://www.financedigest.com/dollar-edges-down-from-six-week-peak-swedish-crown-jumps.html "Dollar edges down from six-week peak, Swedish crown jumps") ($885,000) prize money.

They [join such luminaries as Paul](https://www.financedigest.com/paul-jasper-joins-rimon-laws-san-francisco-office-as-partner.html "Paul Jasper joins Rimon Law’s San Francisco Office as Partner") Krugman and Milton Friedman, previous winners of the prize.

The majority of previous laureates have been from the United States.

The economics [prize is not one of the original five awards created in the 1895 will of industrialist and dynamite inventor Alfred Nobel](https://www.financedigest.com/nobel-medicine-prize-goes-to-explorer-of-ancient-dna.html "Nobel medicine prize goes to explorer of ancient DNA").

It was established by Sweden’s [central bank](https://www.financedigest.com/central-banks-hike-rates-again-but-a-pause-is-coming.html "Central banks hike rates again, but a pause is coming") and first awarded in 1969, its full and formal name being the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.

A separate Factbox lists all this year’s winners of the [Nobel prizes](https://www.financedigest.com/nobel-physics-prize-goes-to-sleuths-of-spooky-quantum-science.html "Nobel physics prize goes to sleuths of ‘spooky’ quantum science").

($1 = 11.3022 [Swedish crowns)](https://www.financedigest.com/u-s-dollar-gains-ahead-of-fed-swedish-crown-falls-after-hike.html "U.S. dollar gains ahead of Fed; Swedish crown falls after hike")

(Additional reporting by Marie Mannes; Writing by Balazs Koranyi; Editing by Susan Fenton)


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