STOCKHOLM (AP) — Former Federal Reserve Chair Ben Bernanke and two other U.S.-based economists won the Nobel Prize in economics for research into bank failures — work that built on lessons learned in the Great Depression and helped shape America’s aggressive response to the 2007-2008 financial crisis.
The Nobel panel at the Royal Swedish Academy of Sciences recognized Bernanke, Douglas W. Diamond and Philip Dybvig on Monday for research that shows “why avoiding bank collapses is vital.”
Their findings in the early 1980s laid the foundations for regulating financial markets, the panel said.
“Financial crises and depressions are kind of the worst thing that can happen to the economy,” said John Hassler of the Committee for the Prize in Economic Sciences. “We need to have an understanding of the mechanism behind those and what to do about it. And the laureates this year provide that.”
Bernanke, 68, examined the Great Depression of the 1930s when he was a professor at Stanford University, showing the danger of bank runs — when panicked people withdraw their savings — and how bank collapses led to widespread economic devastation. He was Fed chair from early 2006 to early 2014 and is now with the Brookings Institution in Washington.
Before Bernanke, economists saw bank failures as a consequence, not a cause, of economic downturns.
Diamond, 68, based at the University of Chicago, and Dybvig, 67, based at Washington University in St. Louis, showed how government guarantees on deposits can prevent a spiraling of financial crises.
“Probably the most gratifying thing for us is that policymakers actually seem to understand it, and the insights that we had, which are pretty simple, could be used in the actual financial crisis,” Diamond told The Associated Press in Chicago.
When it comes to the global economic turmoil created 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 collapse and improved regulation, Diamond said in a call with the Nobel panel.
The trio’s research took on real-world significance when investors sent the financial system into a panic during fall 2008, prompting the longest and most painful recession since the 1930s.
Bernanke, then head of the Fed, teamed up with the U.S. Treasury Department to prop up major banks and ease a shortage of credit, the lifeblood of the economy.
He slashed short-term interest rates to zero, directed the Fed’s purchases of Treasury and mortgage investments and set up unprecedented lending programs. Collectively, those steps calmed investors and fortified big banks — and were credited with avoiding another depression.
The Fed also pushed long-term interest rates to historic lows, which led to fierce criticism of Bernanke, particularly from some 2012 Republican presidential candidates who said the Fed was hurting the value of the dollar and running the risk of igniting inflation later.
And Bernanke’s unprecedented activism at the Fed established a precedent for the central bank to respond with speed and force to economic shocks.
John Hassler member of the Royal Swedish Academy of Sciences presents this years Prize in Economic Sciences during a press conference together with Tore Ellingsen and Hans Ellegren, at the Royal Swedish Academy of Sciences in Stockholm, Sweden, Monday, Oct. 10, 2022. This year’s Nobel Prize in economic sciences has been awarded to three U.S.-based economists “for research on banks and financial crises.”The award to Ben S. Bernanke, Douglas W. Diamond and Philip H. Dybvig was announced Monday by the Nobel panel at the Royal Swedish Academy of Sciences in Stockholm. (Anders Wiklund/TT News Agency via AP)
Former U.S. Federal Reserve Chair Ben Bernanke speaks at the Brookings Institution, Monday, Oct. 10, 2022, in Washington. Bernanke has been awarded the Nobel Prize in economic sciences along with two others. (AP Photo/Alex Brandon)
From left, Tore Ellingsen, Hans Ellegren and John Hassler members of the Royal Swedish Academy of Sciences announce the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2022, during a press conference at the Royal Swedish Academy of Sciences in Stockholm, Sweden, Monday, Oct. 10, 2022. From left on screen Ben S. Bernanke, Douglas W. Diamond and Philip H. Dybvig have been awarded 2022’s Nobel Prize in economic sciences. (Anders Wiklund/TT News Agency via AP)
FILE – Federal Reserve Chairman Ben Bernanke speaks during a news conference at the Federal Reserve in Washington, Wednesday, Dec. 18, 2013. 2022’s Nobel Prize in economic sciences has been awarded to three U.S.-based economists “for research on banks and financial crises.”The award to Ben S. Bernanke, Douglas W. Diamond and Philip H. Dybvig was announced Monday, Oct. 10, 2022 by the Nobel panel at the Royal Swedish Academy of Sciences in Stockholm. (AP Photo/Susan Walsh, File)
Douglas W. Diamond poses for photographers in the lobby of his residence after winning the 2022 Nobel Prize for Economics Monday, Oct. 10, 2022, in Chicago. This year’s Nobel Prize in economic sciences has been awarded to U.S. Federal Reserve Chair Ben Bernanke and two other U.S.-based economists. Bernanke, Douglas W. Diamond and Philip H. Dybvig were recognized Monday for their research into the fallout from bank failures. (AP Photo/Charles Rex Arbogast)
This undated handout provided by Washington University in St. Louis shows Philip H. Dybvig. This year’s Nobel Prize in economic sciences has been awarded to U.S. Federal Reserve Chair Ben Bernanke and two other U.S.-based economists. Bernanke, Douglas W. Diamond and Philip H. Dybvig were recognized Monday, Oct. 10, 2022, for their research into the fallout from bank failures. (Washington University via AP)
Douglas W. Diamond poses for photographers in the lobby of his residence after winning the 2022 Nobel Prize for Economics Monday, Oct. 10, 2022, in Chicago. (AP Photo/Charles Rex Arbogast)
Douglas W. Diamond talks to reporters in the lobby of his residence after winning the 2022 Nobel Prize for Economics Monday, Oct. 10, 2022, in Chicago. (AP Photo/Charles Rex Arbogast)
FILE – In this Nov. 7, 2017, file photo, former Federal Reserve Chair Ben Bernanke attends a ceremony awarding them both with the Paul H. Douglas Award for Ethics in Government, on Capitol Hill in Washington. 2022’s Nobel Prize in economic sciences has been awarded to three U.S.-based economists “for research on banks and financial crises.”The award to Ben S. Bernanke, Douglas W. Diamond and Philip H. Dybvig was announced Monday, Oct.10, 2022 by the Nobel panel at the Royal Swedish Academy of Sciences in Stockholm (AP Photo/Jacquelyn Martin, File)
