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Three economists received the Nobel Prize in Economics in 2022: Ben Bernanke, Douglas Diamond and Philip Dybvig. We tell you what they researched and why it is important
What happened
- On October 10, 2022, the winners of the Nobel Prize in Economic Sciences became known. They became Ben Bernanke, Douglas Diamond and Philip Dybwig “for his research on banks and financial crises.”
- Bernanke, Diamond, and Dibwig started their research on the banking system in the early 1980s.
- For an economy to work, money must be in constant circulation. At the same time, it is important for depositors to be able to quickly withdraw their savings from the bank in an emergency, and borrowers need guarantees that they will not have to repay loans ahead of schedule. Acting as intermediaries that accept deposits from many depositors, banks provide access to their money at any time and also offer long-term loans to borrowers.
- Diamond and Dibwig showed that this makes banks vulnerable to rumors of their impending bankruptcy: according to their theory, if thousands of depositors decide to withdraw their money at a time in a crisis, this will negatively affect creditors. The problem is solved by close cooperation with the state: it not only makes it possible to insure deposits, but also acts as a lender of last resort for banks.
- Diamond also explained another socially important function of banks. According to the scientist, they are better than other institutions in assessing the creditworthiness of borrowers and ensuring that loans are used for productive investments.
- Bernanke analyzed the causes and consequences of the Great Depression of the 1930s in the United States and came to the conclusion that bank collapses can lead to recessions, which, in turn, can develop into long-term depressions. That is why a stable banking system is an important condition for the stability of the entire economy.
- The scientist is also sure that in order to restore the economy after the crisis, the state must take large-scale measures to prevent panic around the banking sector.
- “The findings of today’s laureates have helped us avoid both major crises and costly bailouts,” said the Economics Prize Committee.
What does it mean
In today’s world of developed financial ties, the collapse of the banking sector in one country can start a chain reaction around the world and lead to serious consequences for the global economy.
In 1998, our country faced a serious financial crisis, which was caused, among other things, by the crisis in Southeast Asia, which collapsed the exchange rates of the national currencies of Malaysia, Indonesia, Bangladesh, Burma and Thailand. Then the government was forced to declare a technical default, as well as switch to a floating ruble exchange rate and expand the currency corridor. Banks turned out to be insolvent, and tax revenues to the budget decreased.
In 2008, the collapse of the investment bank Lehman Brothers and several other US mortgage companies led to the Great Recession, which also affected the eurozone and Russia. The wave of crises in different regions ended only by 2013. During the recession, our country’s gold and foreign exchange reserves decreased by $210 billion, and the ruble weakened by 35% against the dollar. The economy emerged from recession only in the third quarter of 2009.
The research of Ben Bernanke, Douglas Diamond and Philip Dybwig helps to understand the banking industry and its importance in the modern world in more detail. Based on the findings of scientists, economists have to answer another important question: how to direct finance to productive investment without causing recurring crises. Solving this problem will prevent long-term economic depressions.