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Nobel Economics Prize Goes to Ben Bernanke, Douglas Diamond and Philip Dybvig for Research on Financial Crises Three Economists, Including Ex-Fed Chair Bernanke, Win Nobel for Work on Bank Crises
(about 11 hours later)
The Nobel Memorial Prize in Economic Sciences was awarded on Monday to Ben S. Bernanke, the former Federal Reserve chair, and two other academics for their research into banks and financial crises. The Nobel Memorial Prize in Economic Sciences was awarded on Monday to Ben S. Bernanke, the former Federal Reserve chair, and two other academics who have helped to reshape how the world understands the relationship between banks and financial crises.
Douglas W. Diamond, an economist at the University of Chicago, and Philip H. Dybvig at Washington University in St. Louis won the prize alongside Mr. Bernanke, who is now at the Brookings Institution in Washington. Douglas W. Diamond, 68, of the University of Chicago, and Philip H. Dybvig, 67, of Washington University in St. Louis — two economists who created a seminal model that explained the dynamics of bank runs and financial meltdowns — won the prize alongside Mr. Bernanke, 68, who is now at the Brookings Institution in Washington.
Mr. Bernanke in 1983 wrote a paper that broke ground in explaining that bank failures can propagate a financial crisis — rather than simply being a result of the crisis. The three economists won for a body of work that stretches back into the 1980s. Their research has delved into different aspects of how banks become vulnerable to upheaval, how bank failures worsen and extend financial disasters, and how the system might be made safer in light of those risks.
Mr. Diamond and Mr. Dybvig the same year wrote a paper on the risks inherent in maturity transformation — the process of turning short-term borrowing into long-term lending. Mr. Diamond also wrote about how banks monitor their borrowers, noting that knowledge about borrowers disappears upon bank failures, extending the consequences of the upheaval. These findings have repeatedly proved relevant to real-world policy, with central bankers drawing on their lessons in 2008 during the financial meltdown and in 2020 when markets seized up at the start of the pandemic. Those policymakers included Mr. Bernanke, who was the Fed chair from 2006 to 2014.
“The laureates have provided a foundation for our modern understanding of why banks are needed, why they’re vulnerable, and what to do about it,” said John Hassler, an economist at the Institute for International Economic Studies at Stockholm University and a member of the prize committee. And the research could soon become pertinent again. Central banks around the world are raising interest rates at a rapid pace to combat a burst of inflation, which is causing markets to shudder and has already contributed to a meltdown in one corner of the financial system in Britain that required emergency intervention.
The economics award, among the highest honors in the field, is not, technically, a Nobel Prize. It is called the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel because it wasn’t among the original categories that Alfred Nobel set out in his will in 1895. It is funded by Sweden’s central bank and has been given out only since 1969, though the Nobel committee promotes it and lists it on its website. The new laureates’ work proved “highly relevant in the Great Financial Crisis in 2008 and 2009,” said Mark Gertler, a New York University economist who has written articles with Mr. Bernanke. “It’s also relevant now, as interest rates are going up, and we’re starting to see stress in financial markets.”
The awarding of last year’s Nobel for economics was bittersweet, because much of the research featured in the prize announcement was co-written by Alan B. Krueger, a Princeton University economist and former White House adviser who died in 2019. The Nobels are not typically awarded posthumously. The Nobel committee cited the economists’ early research, including Mr. Bernanke’s influential 1983 paper that explained how bank failures can propagate a financial crisis rather than simply be a result of one. He drew on his work on financial crises while at the Fed, fighting the worst downturn the United States had faced since the Great Depression. It was a “practical application” of his research, he said at a news conference on Monday hosted by the Brookings Institution after the awards were announced.
Despite that note of sadness, the three recipients — David Card, Joshua D. Angrist and Guido W. Imbens — were celebrated for their work in changing the way that labor markets in particular are studied. Mr. Bernanke said he and his colleagues at the Fed had worked hard to prevent a broader financial meltdown. “I strongly believed that if that happened, that would bring down the rest of the economy,” he said, adding of his research, “It did help me to think about these issues in 2008.”
Mr. Card’s work has challenged conventional wisdom in labor economics, including the idea that higher minimum wages led to lower employment. He has also researched the effect of an influx of immigrants on employment levels among local workers with low education levels — again finding the impact to be minimal — and the effect of school resource levels on student education, which was larger than expected. When the housing market began tumbling around that time, overextended borrowers fell behind on mortgages and a pile of risky loans parceled out across big banks and other institutions began to drag down the financial system. Mr. Bernanke helped set up emergency programs to prevent markets from collapsing and, alongside the Treasury Department, used the Fed’s powers to enable bailouts of bank and insurance company portfolios.
Mr. Angrist and Mr. Krueger tried in the early 1990s to gauge how much benefit people derive from extra years of education. To figure it out, they took advantage of the fact that students born earlier in the year can legally leave school earlier than those born later in the year. Those born earlier tended to get less education and also earned less later on. That downturn provided an example of just how damaging bank failures could be to the real economy. The Fed and Treasury allowed Lehman Brothers to collapse, which Mr. Bernanke has said he and his colleagues believed was their only option. Some critics have since argued that the investment bank could and should have been saved, and it is widely accepted that the ripple effects of that failure worsened the downturn, which reverberated around the world.
That study helped spur the additional work on research methods that Mr. Angrist and Mr. Imbens later carried out. The pair showed that it was possible to identify a clear effect from an intervention in people’s behavior — like a subsidy that might encourage people to ride bicycles to work — even if a researcher could not control who took part in the experiment, and even if the impact varied across individuals. Louise Sheiner, the policy director for the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, wrote in an email that she was “absolutely thrilled” at Mr. Bernanke’s award. “He represents the ideal combination of someone who cares greatly about the real world, has a deep understanding of how it works, using both real experiences and the insights that he gets from his and others’ research, and the confidence and courage to take actions that go beyond the frontier of academic research when it seems necessary.”
The Nobel Peace Prize was awarded to Memorial, a Russian organization; Ales Bialiatski, a jailed Belarusian activist; and the Center for Civil Liberties in Ukraine. All are rights advocates who have become symbols of resistance and accountability at a time when Russia’s invasion of Ukraine has set off the largest ground war in Europe since World War II. Mr. Diamond and Mr. Dybvig wrote in 1983 about the risks inherent in maturity transformation, or the process in which banks turn short-term borrowing into long-term lending. They showed how that setup subjects banks to sudden, panicked withdrawals by customers if there is no deposit insurance or other protection.
The Nobel Prize in Literature was awarded to the French writer Annie Ernaux. Ms. Ernaux’s work, which has been heavily autobiographical, has described her upbringing in a small town in Normandy, an illegal abortion she had the 1960s, her dissatisfaction with domestic life, and a passionate extramarital affair. The research remains “one of the most clear and beautiful papers in modern economics,” said Kenneth Rogoff, an economist at Harvard University.
The Nobel Prize in Chemistry was awarded to Carolyn R. Bertozzi of Stanford University, Morten Meldal of the University of Copenhagen and K. Barry Sharpless of Scripps Research, three scientists whose work harnessed the power of molecular interaction and introduced new ways of studying the natural world. Mr. Diamond also wrote about how banks monitor their borrowers, noting that knowledge about borrowers disappears when banks fail, making the upheaval worse.
The Nobel Prize in Physics was awarded to John Clauser, of J.F. Clauser and Associates in Walnut Creek, Calif.; Alain Aspect of the Institut d’Optique in Palaiseau, France; and Anton Zeilinger of the University of Vienna in Austria. The three scientists had explored the foundations of quantum mechanics in their independent works. “The laureates have provided a foundation for our modern understanding of why banks are needed, why they’re vulnerable and what to do about it,” John Hassler, an economist at the Institute for International Economic Studies at Stockholm University and a member of the prize committee, said during the news conference announcing the prize.
The Nobel Prize in Physiology or Medicine was awarded to Svante Pääbo, a Swedish scientist who peered back into human history by retrieving genetic material from 40,000-year-old bones. Mr. Diamond spoke by phone at the conference. Asked whether he had any warnings for banks and governments today, given recent market turmoil, Mr. Diamond said that financial crises become worse when people begin to lose faith in the stability of the system.
“In periods when things happen unexpectedly — like, I think many people are surprised how rapidly nominal interest rates have gone up around the world — that can be something that sets off fears in the system,” he said. “The best advice is to be prepared, for making sure that your part of the banking sector is both perceived to be healthy, and to stay healthy, and respond in a measured and transparent way to changes in monetary policy.”
Mr. Dybvig did not respond to an emailed request for comment on his prize.
The three economists’ research findings “reinforce each other,” the Nobel committee said in its background documents on the prize. “Together they offer important insights into the beneficial role that banks play in the economy, but also into how their vulnerabilities can lead to devastating financial crises.”
Mr. Diamond said at the news conference that the world is better poised for any financial upheaval now than it was during the financial crisis in 2008, because “recent memories of that crisis” and regulatory improvements have made the banking system less vulnerable.
Still, the weaknesses that he and Mr. Dybvig have identified extend beyond banks and can bubble up in other parts of the financial system, like insurance firms or mutual funds, he noted.
Mr. Bernanke was also asked about how the three men’s research applies to the current moment.
“We’re certainly not in anything like the dire straits we were in 14 years ago,” Mr. Bernanke said of the state of the U.S. financial system. Still, he noted that “it is true that even if financial problems don’t begin an episode, over time” they “can add to the problem, and intensify it — so that’s something, I think, that we really have to pay close attention to.”
And asked for advice to younger economists, Mr. Bernanke seemed to allude to the twists his career took, from researching financial crises to steering the world’s largest economy through one.
“One of the lessons of my life is, you never know what is going to happen,” he said.