The Nobel Prize in Economics awarded to Ben Bernanke, Douglas Diamond and Philip Dybvig for their work on financial crises

CNN Business

Former Chairman of the Federal Reserve Ben BernankeDouglas Diamond and Philip Dybvig were awarded the Nobel Prize in Economics on Monday for their work with banks and financial crises.

The three American economists were recognized by the Royal Swedish Academy of Sciences for their work in the early 1980s, which the institute said formed the basis of our modern understanding of why banks are needed, their key vulnerabilities and how their collapse can put push into financial meltdowns.

Bernanke, who led the US Federal Reserve during the 2008 global financial crisis, received the award for his research into the Great Depression. His work showed that bank runs were a key reason why the crisis became so severe and entrenched.

“People had seen that banks go bankrupt, but it was more thought [of] as a consequence of the crisis rather than [a] cause of the crisis,” said economist John Hassler, who sits on the Nobel Committee, at a press conference. “Now Bernanke’s views have become the conventional wisdom.”

Diamond and Dybvig’s research found that banks help resolve tensions between borrowers and savers, whose goals may diverge. Borrowers want to know they won’t have to repay their debt too early, while savers want quick access to funds in the event of an emergency. While this intermediary role is important, it also makes lenders vulnerable to runs if rumors about their financial position begin to circulate, Diamond and Dybvig found.

Answering questions at Monday’s press conference, Diamond noted that the rapid rise in interest rates around the world was causing market volatility, pointing to recent commotion in Britain.

But he believes the system is more resilient than it used to be because of hard lessons from the 2008 crash.

“Recent memories of that crisis and improvements in regulatory policies around the world have left the system much, much less vulnerable,” Diamond said.

Bernanke, who was in charge of the Fed from 2006 to 2014, played a key role in managing the fallout during that period.

While Bernanke served as chairman, the central bank pioneered a program of quantitative easing, buying up assets to help stimulate economic growth.

He also improved communication with the public about the central bank’s thinking and intentions. These approaches are now a standard part of the Fed’s playbook for stabilizing markets and supporting the economy.

However, the failure of the Fed and the US Treasury to save Lehman Brothers from collapse has been the subject of considerable debate. The investment bank’s implosion in September 2008 is seen as a turning point in the crisis.

“There are many questions about … the legal ways the US regulators could have resolved Lehman, and some argue that it was essentially impossible for them to do so,” Diamond said on Monday. “But had they found a way, I think the world would have had a less severe crisis than it did.”

Paul Krugman, a Nobel Prize-winning economist and longtime New York Times columnist, expressed his support for the recipients on Twitter.

“Now that’s a prize many of us will be happy to see,” he said. “Fundamental work of enormous practical importance – perhaps even more so as the consequences of monetary policy tightening and the skyrocketing dollar trigger more crises.”

Bernanke is now a distinguished senior fellow at the Brookings Institution, a high-profile think tank. Diamond is a professor at the University of Chicago, while Dybvig is at Washington University in St.

The Nobel Prize, officially known as Sweden’s Riksbank Prize in Economic Sciences, comes with a prize of 10 million Swedish kroner ($885,370) to be divided equally among the laureates.

It was not instituted by Alfred Nobel, but established by Sweden’s central bank and awarded in memory of Nobel.

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