The Nobel Prize in Economics is awarded to researchers in financial crises

Sweden’s Reichsbank awards this year’s coveted award to three men: Ben S. Bernanke, Douglas W. Diamond, and Philip H. Devwig.

The former head of the US Central Bank (Federal Reserve), Ben Bernanke, was awarded the third Nobel Prize in Economics for his research on so-called bank operations. This happens when too many people try to withdraw their bank balances at the same time, as a result of which even healthy banks can fail. Bernanke – now at the Brookings Institution for Research – has analyzed the Great Depression of the 1930s, the largest economic crisis in modern history. Show, among other things, how bank management makes the financial crisis more serious and protracted.

The American shares the award with Douglas Diamond and Philip Dipvig, who are also from the United States. “Their discoveries have improved how society deals with financial crises,” said Sweden’s Reichsbank.

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deposit

For the economy to function, customers’ savings must be invested, for example, in housing. This can be fine for a long time, but once the saver wants instant access to their money, a problem arises. Because businesses and homeowners cannot be forced to pay off their loans early. Diamond and Dibvig described in a 1983 paper what is the solution to this problem. According to economists, banks need to attract deposits in a short time frame and convert those bank balances into loans to businesses, governments and individuals in the long term.

With a deposit, you can secure your savings for a predetermined period. You often get higher interest than you would on a regular savings account, because the bank knows for sure that it has your savings for an agreed period.

Diamond and Dybvig also showed how rumors could be a downfall for banks, due to an outpouring of banks. This scenario could be avoided if the government provided deposit insurance and acted as lender of last resort to banks.

Swedish National Bank

The Nobel Prize in Economics was not invented by Alfred Nobel himself, but was established in 1969 by the Swedish Reichsbank, to celebrate the bank’s 300th anniversary. Hence the award is officially called the “National Bank of Sweden Prize for Economic Sciences in Memory of Alfred Nobel”. Dutch economist Jan Tinbergen – together with Norwegian economist Ragnar Frisch – received this award for the first time.

Source: Nobelprize.org

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