Nobel Prize in Economic Sciences 2022
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Ben S. Bernake, Douglas W. Diamond, and Philip H. Dybvig was awarded the Sveriges Riksbank Prize in Economic Sciences 2022 by the Royal Swedish Academy of Sciences in memory of Alfred Nobel for research on banks and financial crises.
Their discoveries helped society deal with financial crises better.
Nobel laureates Ben Bernake, Douglas Diamond, and Philip Dybvig have helped in improving our knowledge on the role of banks in an economy, especially during financial crises. Their research stresses on the importance of avoiding bank collapses.
Modern banking research helps us understand why we have banks, how to make them less liable in crises, and how bank collapses aggravate financial crises.
Ben Bernake, Douglas Diamond, and Philip Dybvig laid the foundation for this research in the early 1980s. Their analyses have big practical importance, and help in regulating financial markets and dealing with financial crises.
It is very important to channel savings to investments for the economy to function. However there is a lot of conflict involved here. While savers want instant access to their money in the event of unexpected outlays, businesses and homeowners need assurance that they will not be forced to pay their loans prematurely. Diamond and Dybvig showcase how banks offer an optimal solution to this problem in their theory. Banks can offer long term loans to borrowers while allowing depositors to access their money when they wish. They can act as intermediaries which accept deposits from many users.
Their analysis also explained how the combination of two activities often lead to rumors about the bank’s imminent collapse. A rumor can quickly become a self fulfilling prophecy. If a large number of savers run to the bank to withdraw their money at the same time, a bank run occurs and the bank collapses. If the government provides deposit insurance and acts as a lender of last resort to banks, these dangerous dynamics can be prevented.
Diamond highlights another societally important function performed by banks. Since they act as intermediaries between many savers and borrowers, banks are better suited to assess the borrowers’ creditworthiness, for ensuring the loans are used for good investments.
The great depression of the 1930’s, the worst economic crisis in modern history was analyzed by Ben Bernake. He explains how bank runs were responsible for the crisis being so deep and prolonged. Valuable information about borrowers was lost as the banks collapsed. It was very difficult to retrieve the lost information. This diminished the society’s ability to channel savings to productive investments.
According to Tore Ellingsen, Chair of the Committee for the Prize in Economic Sciences, the laureates’ insights have helped us in avoiding serious crises and expensive bailouts.
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Check your knowledge
Answer) Ben S. Bernake, Douglas W. Diamond, and Philip H. Dybvig
Answer) Royal Swedish Academy of Sciences
Answer) Alfred Nobel