Economists win Nobel prize for work on bank runs

Ben Bernanke, a former chair of the Federal Reserve, shares the award with Douglas Diamond and Philip Dybvig

Mr Bernanke is most famous for his time as a central banker. But it was his work at Stanford University that the committee cited. They mentioned an article on economic history published in 1983 that looked at the causes of the Depression. 

Unlike previous historical accounts, Mr Bernanke’s work emphasised the role of the banking system, arguing that a self-sustaining cycle of bank runs caused the plunge in economic activity in the 1930s, rather than just being a consequence of it.

The Economist 10 October 2022

https://www.economist.com/finance-and-economics/2022/10/10/economists-win-nobel-prize-for-work-on-bank-runs

Sveriges Riksbanks pris i ekonomisk vetenskap till Alfred Nobels minne går i år till amerikanerna Ben Bernanke, Douglas Diamond och Philip Dybvig för forskning som de grundlade i början av 1980-talet.

Douglas Diamonds och Philip Dybvigs forskning från samma år visar teoretiskt hur banker löser en konflikt mellan sparares behov att när som helst kunna ta ut sina pengar och låntagares behov av långfristig finansiering. Samtidigt skapar just den förmågan en inneboende sårbarhet för rykten om bankens nära förestående kollaps.

Ben Bernanke har hyllats för att han mötte finanskrisen med snabbfotade jättestimulanser som förflyttade gränserna för vad en centralbank kan göra, och räddade amerikansk ekonomi undan en utdragen depression. Men han har också kritiserats för att ha räddat banker som medverkade till krisen, liksom för att den extrema stimulanspolitiken lagt grunden till nya obalanser.

Nils Åkesson DI 10 oktober 2022

https://www.di.se/analys/insikter-om-bankernas-roll-i-kriser-gav-ekonomipris/

Fixing bank runs (sort of) wins the Nobel prize

(Lysande)

How fascinating it is that Bernanke, Diamond and Dybvig won Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel — and how super fascinating that they won it together.

There’s good reason of course. Diamond and Dybvig’s 1983 paper was the first real model of its kind. 

Its explanation of sunspot bank runs is genius. Diamond and Dybvig are geniuses. 

Meanwhile Ben Bernanke (plus Mervyn King, US Treasury officials and, frankly, Vishnu the Preserver) saved the financial system. 

After 2008, we avoided another Great Depression. In the immortal words of Gordon Brown, they saved the world . . . the world’s banking system. They deserve their prize.

Was there ever an alternative to accepting that upcycles end in disaster? Was there ever a different approach to bank runs than lenders-of-last-resort, low rates, bailouts, QE, OMT, and a panoply of other acronyms? 

Given today’s inflation, we really have to ask. Maybe the banking sector should have had its own equivalent of an inflation target. What is the point of a 2 per cent target if the financial system can inflate itself at will? (OK, that would have been too much communism.)

Alternatively, what about letting the wildfire burn through the system in 2008, Ayn Rand style, and then picking up the charred pieces of Freddie and Fannie afterwards? (OK, that would have been too little communism.)

Edward Price FT 10 October 2022

https://www.ft.com/content/52f3a45f-548c-48de-b0f5-b1dd9f0bb814

The alchemy is “the belief that money kept in banks can be taken out whenever depositors ask for it”, Wolf

Lord Mervyn King, former governor of the Bank of England.  His book is called The End of Alchemy.

https://englundmacro.blogspot.com/2016/06/the-alchemy-is-belief-that-money-kept.html

Press release: The Prize in Economic Sciences 2022

https://www.nobelprize.org/prizes/economic-sciences/2022/press-release/

Why We Still Listen to What Dimon and Bernanke Say

Rapt attention for one and a Nobel for the other show the lingering power of the 2007-08 crisis amid fears that another may be in the making.

The money-printing or “quantitative easing” that he pioneered seemed to prop up the stock market on its every step forward. It will have a place with the Nobel prize in his legacy.

Bernanke’s role in causing the crisis and then attempting to end it will doubtless be debated for decades, and it’s strangely provocative for the Nobel committee to decide to make him the award at this juncture.

It was the Fed’s monetary policy over the preceding decade, in which Bernanke had played a part as a Fed governor, that created the conditions for the crisis in the first place. 

Bernanke was plainly too slow to see the systemic risks building, particularly in the sub-prime credit market. Having done the job, it’s worth listening to Bernanke’s mild warning in his comments on receiving the award that even if financial problems don’t begin an episode, they can over time “add to the problem, and intensify it — so that’s something, I think, that we really have to pay close attention to.” 

Dimon also had a grasp of the banking system’s essential fragility, and was constantly on the lookout for risk. The bank that he took over on Jan. 1, 2006 — exactly a month before Bernanke took over at the Fed — had done more than any other institution to develop the credit derivatives that were to enable the financial implosion.

Somehow, JPMorgan avoided the worst of this, and as the years have gone by it’s gained respect in a way its peers have been unable to do.

John Authers Bloomberg 11 oktober 2022

https://www.bloomberg.com/opinion/articles/2022-10-11/nobel-winner-bernanke-and-dimon-command-attention-as-crisis-fears-build-again

Bernanke was at the Federal Reserve in the 2000s and 2010s. 

We’d argue now, as we argued at the time, that Mr. Bernanke and the Fed created the monetary conditions that led to the worst financial panic in 80 years.

Mr. Bernanke took over as Fed chairman from 2006-2014. Yet the Fed failed to anticipate the financial panic and crash. 

Like many economists and most politicians, the Fed viewed financial stability as a matter of regulation while ignoring the incentives created by monetary policy.

In the official transcript of the May 9, 2007, Federal Open Market Committee meeting, Fed open market account manager Bill Dudley declared that “the market turbulence that began in earnest on February 27 is now a distant memory.” Within weeks, investment bank Bear Stearns had to bail out two of its hedge funds with exposure to subprime mortgages.

WSJ Editorial 10 October 2022

https://www.wsj.com/articles/ben-bernanke-wins-a-nobel-in-theory-11665442267

Fed will almost certainly stay the course, for two reasons.

First, it’s the only way to get US inflation under control. Excessive fiscal and monetary stimulus stoked the demand for goods, services and labor, so the central bank must now tighten and push up unemployment enough to slow wage and price increases. 

If it fails to act aggressively enough, inflation will become more embedded, forcing the Fed to act even more forcefully later with even harsher consequences for the US and global economy.

Second, the Fed’s congressional mandate is to achieve maximum sustainable employment consistent with price stability for the US economy. 

Bill Dudley Bloomberg 10 oktober 2022

https://www.bloomberg.com/opinion/articles/2022-10-10/the-federal-reserve-owes-the-world-a-mea-culpa

Lustigt nog har jag personligen framkallat en bank-run.

Ja, HSB var ju ingen bank. Det var det som var grejen.

Göran Persson, jag och krisen inom HSB

https://englundmacro.blogspot.com/2007/12/gran-persson-jag-och-krisen-inom-hsb.html