Former Fed Chair Bernanke shares Nobel

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.”

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World News

October 10, 2022 - 3:28 PM

Former Federal Reserve Board Chairman Ben Bernanke (pictured) answers questions at a conference. (Photo by Win McNamee/Getty Images/TNS)

STOCKHOLM (AP) — Former U.S. Federal Reserve Chair Ben Bernanke, who put his academic expertise on the Great Depression to work reviving the American economy after the 2007-2008 financial crisis, won the Nobel Prize in economic sciences along with two other U.S.-based economists for their research into bank failures.

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, who is 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. He added that he was “very happy” and “quite surprised” to get the call.

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.

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