The winners of the Nobel Prizes, which honor those who serve humanity in the world of science and art, have started to be announced as of October 3. The Nobel Committee has finally announced the winners of the Nobel Prize in Economics today.
The committee awarded Ben S. Bernanke, Douglas W. Diamond and Philip H. Dybvig to the 2022 Nobel Prize in Economics. The committee explained that the work of the three names improved the way society copes with financial crises.
Nobel-winning work by three economists:
According to the statement shared by the committee, three economists explained with modern banking research why there are banks, how they became less vulnerable in the crisis and how bank collapses exacerbated financial crises. The team laid the foundations for their work in the 1980s.
According to the study of economists, savings had to be channeled into investments for the economy to function. But this also created a paradox: savers wanted to have instant access to their money in case of unexpected expenses, while businesses and homeowners had to know they wouldn’t have to pay off their loans early.
“Banks became a bridge between savers and entrepreneurs”
Diamond and Dybvig showed in their theory how banks offer an optimal solution to this problem. Accordingly, banks act as intermediaries accepting deposits from many savers, allowing depositors to access their money at any time, while also offering long-term loans to borrowers.
On the other hand, the study revealed that these two activities of banks also make banks vulnerable to collapses. The bank could collapse if too many savers applied to the bank to withdraw their money at the same time. This situation could have been avoided by the government providing deposit insurance and acting as the lender of last resort to the banks.
Diamond also revealed how banks fulfill another socially important function in the study. Accordingly, as intermediaries between many savers and borrowers, banks were better suited to assess the creditworthiness of borrowers and ensure that loans are used for good investments.
Ben Bernanke analyzed the Great Depression of the 1930s, the worst economic crisis in modern history. Bernanke showed how bank fraud played a role in the deepening and prolongation of the crisis. When banks collapsed, valuable information about borrowers was lost and could not be quickly reconstructed. Society’s propensity to channel savings into productive investments has therefore been seriously reduced.
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