Three American economists grab Nobel prize

The US economist-trio including former Federal Reserve chair Ben Bernanke won this year's Nobel Economics Prize.

The three US economists – former Federal Reserve chair Ben Bernanke, Douglas Diamond and Philip Dybvig – were awarded the Nobel Prize in economics today for their work on banks and financial crises. According to the Royal Swedish Academy of Sciences, the trio won the award for their research on how regulating banks and propping up failing lenders with public cash can stave off an even deeper economic crisis, such as the Great Depression of the 1930s.

They are also lauded for laying the foundation of how world powers now tackle global crises like the recent pandemic or the Great Recession of 2008. 

“The actions taken by central banks and financial regulators 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, a key culprit of the crisis, were saved. But society on the whole benefited, 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 less severe. "It probably would have been better, if Lehman Brothers had not collapsed unexpectedly," Diamond said. “Had they found a way, I think the world would have had less of a severe crisis."

Bernanke, who led the US central bank during the 2008 global financial crisis, received the award for his research on the Great Depression. His work showed that bank runs were a decisive reason the crisis became so severe and entrenched. Ironically Bernanke was the chair of the US Federal Reserve at the time of Lehman's collapse in 2008, which became one of the main catalysts of the world's biggest financial turmoil since the 1930s. Bernanke, who was in charge of the Fed from 2006 to 2014, played a key role in managing fallout during that period.

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 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 a century in many parts of the world.

Diamond and Dybvig’s research showed that banks help resolve tensions between borrowers and savers, whose goals can diverge. Borrowers want to know they won’t have to repay their debts too soon, while savers desire quick access to funds in case of an emergency. While this intermediary role is important, it also makes lenders vulnerable to runs if rumors about their financial position start to circulate, Diamond and Dybvig found.

Bernanke is now a distinguished senior fellow at the Brookings Institution, a high-profile think tank. Diamond is a professor at the University of Chicago, while Dybvig is at Washington University in St Louis. The three economists will receive an equal share of the 10 million Swedish crown ($885,370) prize money. 

The economics prize is not one of the original five awards created in the 1895 will of industrialist and dynamite inventor Alfred Nobel. It was established by Sweden's central bank and first awarded in 1969, its full and formal name being the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. The majority of previous laureates have been from the United States.