STOCKHOLM — Former Federal Reserve Chairman Ben Bernanke and two other American economists won the Nobel Prize in economics for their research on bank failures, work that drew on the lessons of the Great Depression and helped shape America’s aggressive response to the 2007-2008 financial crisis.

On Monday, the Nobel panel of the Royal Swedish Academy of Sciences recognized Bernanke, Douglas W. Diamond and Philip Dybvig for research that shows “why avoiding bank failures is so important.”

Their findings in the early 1980s laid the groundwork for regulating financial markets, the group noted.

“Financial crises and depressions are the worst things that can happen to an economy,” said John Hassler of the Economic Science Prize Committee. “We need to understand the mechanism behind it and what to do about it. And this year’s laureates ensure it.”

Bernanke, 68, examined the Great Depression of the 1930s when he was a professor at Stanford University, showing the dangers of bank runs — when people panicked and withdrew their savings — and how bank failures led to widespread economic destruction. He was chairman of the Fed from early 2006 to early 2014, and now works at the Brookings Institution in Washington.

Before Bernanke, economists viewed bank failures as a consequence, not a cause, of an economic downturn.

Diamond, 68, of the University of Chicago, and Dybwig, 67, of Washington University in St. Louis, showed how government deposit guarantees can prevent financial crises from spreading.

“Probably the best thing for us is that policymakers seem to understand this, and what we got, which is pretty simple, can be used in a real financial crisis,” Diamond told the Associated Press in Chicago.

When it comes to the global economic turmoil caused by the COVID-19 pandemic and Russia’s war in Ukraine, the financial system is “much, much less vulnerable” to crises because of memories of the 2000s crash and improved regulation, Diamond said in the interview. with the Nobel panel.

The trio’s research took on real-world significance when investors panicked the financial system in the fall of 2008, triggering the longest and most painful recession since the 1930s.

Bernanke, then head of the Fed, teamed up with the US Treasury Department to prop up big banks and reduce the credit deficit, the lifeblood of the economy.

He lowered short-term interest rates to zero, ordered the Fed to buy Treasuries and mortgage-backed investments, and created unprecedented lending programs. Taken together, the moves reassured investors and strengthened the big banks — and are credited with averting another depression.

The Fed also pushed long-term interest rates to historic lows, prompting fierce criticism of Bernanke, particularly from some Republican presidential candidates in 2012, who said the Fed was hurting the dollar and risked stoking inflation later.

And Bernanke’s unprecedented activism at the 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 poured money into the financial system. Aggressive intervention – along with massive government spending – quickly halted the recession and sparked a powerful economic recovery.

But the rapid recovery also came at a cost: Inflation began to rise sharply last year and is now near 40-year highs, forcing the Fed and other central banks to reverse course and raise rates to cool the economy.

At a press conference on Monday, Bernanke expressed confidence in current Fed Chairman Jerome Powell and his former central bank colleagues, but said they faced a “very difficult task” in trying to get the economy into a so-called soft landing: raising interest rates enough. to cool the economy and curb inflation without causing a recession.

Bernanke said he and his wife turned off their cell phones last night and learned about Nobel when their daughter called with the news.

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

Before that, economists blamed the Fed for not printing enough money to prop up the faltering economy. Bernanke agreed, but found that lack of money could not explain why the depression was so devastating and lasted so long.

The problem, according to him, is the collapse of the banking system. In a panic, depositors pulled money out of faltering banks, which then couldn’t make the loans that kept the economy growing.

“The result,” writes the Nobel Committee, “was the worst global recession in modern history.”

“Ben Bernanke’s 1983 paper was surprisingly original and had a major impact, not in explaining how the Great Depression started, but in explaining why it lasted so long,” said former Fed vice chairman Alan Blinder, an economist at Princeton University. the insight has influenced the thinking of economists ever since.’

Diamond and Dybwig showed that banks play a crucial role in solving a difficult financial problem: depositors want instant access to their money, but businesses need time to see their businesses making a profit before they can repay their loans in full. In a 1983 paper, Diamond and Dybwig explored the key role of banks as intermediaries between depositors and borrowers.

They also found that banks are vulnerable: when depositors fear their bank is in danger of failing, they pull out their money, forcing the bank to borrow money to raise money to cover withdrawals. To stop bank runs – and their economic consequences – governments can insure deposits and act as a lender of last resort to banks.

The idea: “If you could prevent the panic, the banks would be fine,” said Simon Johnson, an MIT economist who has written about the financial crisis. “It’s a very, very powerful idea that’s at the heart of how people think about financial stability.”

In a 1984 paper, Diamond also established that banks play a critical role in assessing the creditworthiness of borrowers and ensuring that loans go to worthy projects and are repaid.

The economics prize capped off a week of Nobel Prizes in Medicine, Physics, Chemistry, Literature and Peace. They have a cash prize of SEK 10 million (almost $900,000) and will be awarded on December 10.

Unlike other prizes, the Economics Prize was not established by Alfred Nobel’s will in 1895, but by the Central Bank of Sweden in his memory. The first winner was chosen in 1969.

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