Ben Bernanke, Douglas Diamond and Philip Davig. The award recognizes the recipient’s role in advancing our understanding of the role of banks in the economy, especially during the financial crisis. The Nobel website summarizes their contributions as follows:
For the economy to work, savings must be invested. Here’s a conflict, however: savers want immediate access to funds in the event of unexpected expenses, while businesses and homeowners need to know they won’t be forced to pay off their loans prematurely. In their theory, Diamond and Dybvig show how banks can provide the best solution to this problem. By acting as an intermediary that accepts deposits from many depositors, banks can allow depositors to access their money when they want, while also providing long-term loans to borrowers.
However, their analysis also showed how the combination of the two activities made the bank vulnerable to rumours of its impending collapse. If a large number of depositors run to the bank to withdraw money at the same time, the rumor can become a self-fulfilling prophecy – a run occurs and the bank fails. These dangerous dynamics can be prevented by governments providing deposit insurance and acting as lender of last resort for banks.
Diamond shows how banks perform another important social function. As an intermediary between many depositors and borrowers, banks are better positioned to assess the creditworthiness of borrowers and ensure that loans are for good investments.
Ben Bernanke analyzes the Great Depression of the 1930s, the worst economic crisis in modern history. Among other things, he shows how a bank run can be the determining factor in how deep and persistent a crisis has become. When banks fail, valuable information about borrowers is lost and cannot be quickly rebuilt. Society’s ability to channel savings into productive investment is thus severely impaired.
While some were critical of bank bailouts during the Great Recession, Bernanke’s view was that how to prop up failing banks was necessary to avoid a deeper economic crisis.Additional abstracts contributed by the authors can be found at New York Times, marginal revolution, BBC, Wapo There are a lot more.
Is Bernanke’s research relevant to our current era? Of course it is.from marginal revolution:
Bernanke’s doctoral dissertation was on the concept of option value and irreversible investing. A modest increase in business uncertainty can lead to a large drop in investment due to the desire to wait, exercise “option value” and obtain more information. this work Published on QJE in 1983…
This is Ben and co-authors: “We are the first to document that virtually all recessions in the U.S. over the past 30 years have preceded higher oil prices and tighter monetary policy…”
