The Sveriges Riksbank Prize in Economic Sciences, in memory of Alfred Nobel 2022 was awarded to Ben S. Bernanke, Douglas W. Diamond, Philip H. Dybvig for research on banks and financial crises. The share of the prize between the three economists was in the share of one-third, each.
The award has been given since 1966 by the Royal Academy of Swedish Science to individuals for their outstanding contributions to the discipline of economics. This was the 54th award with the laureate count going to ninety-two. The three researchers laid the foundations for modern banking research in the early 1980s.
John Maynard Keynes and Adam Smith- the father of modern macroeconomics are known for taking America out of the great depression in the 1930s . They are also known for these famous lines of his: “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually slaves of some defunct economist.”
Similar to this economist, being Keynes whose language people unconsciously speak, when speaking regarding banking, it is the ideas of these three individuals and their ground-breaking research upon which people built upon and speak about.
Ben Shalom Bernanke is an American Economist, who was the 14th chairman of the Federal Reserve from 2006 to 2014. The post is in terms of its impact, one of the most powerful in the world, as is visible in the current times with the impact of the Fed hiking its rates on the global economy, under Jerome Powell.
After his stint at the Fed, he was attached as a fellow at the Brookings Institute, Washington D.C., USA. He was affiliated with this particular institute at the time of the award. Bernanke demonstrated that failing banks played a decisive role in the Great Depression by analyzing statistical data, and locating historical sources. His research provides evidence that bank crises can potentially lead to catastrophic outcomes. The American Economic Review paper on banking and the Great Depression of 1983 was the paper which fetched him the Nobel.
Douglas Warren Diamond is an American Economist, and is the Merton H. Miller Distinguished Service Professor of Finance at the University of Chicago’s Booth School of Business with which he was affiliated at the time of the award. His specialisation, as the Nobel suggests lies in financial intermediaries, liquidity and financial crises. In their theoretical models, Diamond and Dybvig explain why banks exist, their role in society, and how society can lessen their vulnerability to rumours about their impending failures.
Philip Hallen Dybvig is also an American economist, like the other two and is the Boatmen’s Bancshares Professor of Banking and Finance at the Olin Business School of Washington University in St. Louis. He- in collaboration with Diamond formulated the Diamond-Dybvig model which forms the basis of various banking models, and their paper Bank Runs, Deposit Insurance and Liquidity- 1983, stands as one of the most cited papers in Finance and Banks!
The collaboration of the two dates back to the 1970s when the two were pursuing their doctorates at Yale.
Out of the three winners, while Diamond and Dybvig were seen as expected winners and were well received, Bernanke faced some scathing criticisms. His criticism drew and was based upon his years as the Chairman of the Federal Reserve.
Based on his research that banks sustain and contribute to the economic crisis, he advocated for liquidity during the 2008 subprime problem, and the fall of the Lehman Brothers. This was characterised by many as a turn by him on his own findings, only when he released bailouts for big firms such as the American International Group.
He justified it, by saying that he wasn’t going to be the Second Chairman presiding over a repeat of the Great Depression. The camps supporting and opposing him got divided into two. One credited him for handling the crisis in a heroic manner and acting in a proactive manner to prevent the system of failing. The other camps were dissatisfied with the bailout being financed from the taxpayer’s money and the companies rewarding their executives responsible for the crisis with huge bonuses from those bailouts.
The idea that the western banking system was too big to fail was used by both to justify, and criticise the Fed’s actions. This division again became visible with one side supporting Bernanke, as a deserving person to receive the Nobel, while the other criticising him for his own findings failing when put to test in 2008.
Nevertheless, keeping aside the controversies, and one’s professional career away from their academic one- we cannot discredit the contribution of the three to academia, and their impact on the upcoming generations. The three lay the foundation for modern bank regulation!
Written by Arhaan Siddiqui
Edited by Kushi Mayur