Ben Bernanke, Douglas Diamond and Philip Dybvig together won the 2022 Nobel Prize in Economics for their research on banks and financial crises.

The Royal Swedish Academy of Sciences, which awards the prize, said that their discoveries improved how society deals with financial crises.

Why their research is important

The academy said that Bernanke, Diamond and Dybvig have significantly improved our understanding of the role of banks in the economy, particularly during financial crises, an important finding in their research is why avoiding bank collapses is vital.

Bernanke is the former US Federal Reserve chair, while Diamond is a professor at the University of Chicago and Dybvig is a professor at the Washington University in St Louis, USA.

Bernanke is currently a distinguished senior fellow at the Brookings Institution.

“The laureates’ insights have improved our ability to avoid both serious crises and expensive bailouts,” said Tore Ellingsen, Chair of the Committee for the Prize in Economic Sciences.

Bank crises and their role in depression

Diamond and Dybvig developed theoretical models that explain why banks exist, how their role in society makes them vulnerable to rumours about their impending collapse, and how society can lessen this vulnerability. These insights form the foundation of modern bank regulation.

Meanwhile, through statistical analysis and historical source research, Bernanke demonstrated how failing banks played a decisive role in the global depression of the 1930s, the worst economic crisis in modern history.

Bernanke’s research shows that bank crises can potentially have catastrophic consequences.

Why Bernanke, an economist and a policymaker, was awarded the Prize

Bernanke was head of the US central bank, the Federal Reserve, for two terms from 2006 to 2014, and was able to put knowledge from his research into policy during the 2008 global financial crisis.

His insight, which went against conventional wisdom at the time, underpinned “crucial elements of economic policy” not only in the Fed’s response to the 2008 crisis but also in the measures taken to avert a more severe global downturn when the coronavirus pandemic hit in 2020, the committee said.

He was criticised for failing to foresee the 2008 crisis and failing to tackle the problems building in property markets, and for then deploying vast sums of public money to rescue some Wall Street companies from the consequences of their bets on subprime mortgages.

He also pioneered the use of unconventional monetary policy, launching the Fed’s quantitative easing programme to boost the economy when interest rates were already at zero.

Douglas Diamond

Get Swarajya in your inbox.