A group of US economists have won awarded the Nobel Prize in Economics for their work on banking’s role in the economy and avoiding collapses during financial crises.
Ben Bernanke, the former head of the US Federal Reserve, was one of the recipients.
He will split the cash award of €926,680 (10 million Swedish kronor) with Douglas W. Diamond and Philip H. Dybvig.
Bernanke studied how the Great Depression in the 1930s transformed from a relatively ordinary recession into «the worst economic crisis in modern history”.
He found that bank runs — when panicked customers withdraw their savings en masse — can cause banks to collapse.
Diamond and Dybvig were also honoured for their work on bank runs and explaining “why banks exist and how their role in society makes them vulnerable to rumours about their impending collapse».
And they found that governments can prevent bank runs by providing deposit insurance.
«For the everyday person, this prize gives us the tools to reduce the risks in the financing sector and therefore to avoid financial crisis with a much better understanding of what the regulator has to look at nowadays,» said Christofer Edling, a member of the Royal Swedish Academy of Sciences.
The trio’s work endured a real-life test during the 2007-2008 financial crisis.
At the time, Bernanke was the head of the Federal Reserve and he worked with the US Treasury Department to prop up major banks and ease a shortage of credit.
He lowered short-term interest rates to zero, directed the Fed’s purchases of Treasury and mortgage investments and set up lending programmes.
And while his work did not prevent the recession that followed, it is credited with avoiding another depression.
The economists will receive their prize money on 10 December. Unlike the other Nobel Prizes, the economics award was not established by Alfred Nobel in his will.
The Swedish central bank instead created it in 1969.
Additional sources • AP