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3 economists win Nobel Prize in economic sciences for work on banks, financial crises

STEVE INSKEEP, HOST:

Three Americans have been awarded the Nobel Prize in Economics for their work on bank runs and protecting the financial system. Ben Bernanke shares the prize with two academic economists, Douglas Diamond and Philip Dybvig. NPR's Scott Horsley joins us now with the details. Scott, good morning.

SCOTT HORSLEY, BYLINE: Good to be with you, Steve.

INSKEEP: And so sorry that you did not win the Nobel Prize in economics once again, but your year may come. Anyway, it always seemed fortuitous that Ben Bernanke was the head of the Fed during the financial crisis because of his particular background.

HORSLEY: Yeah. His background was really as a historian of the Great Depression. He documented how the collapse of the financial system in the 1930s turned what might have been an ordinary recession into something much worse and longer lasting. Bernanke then put those lessons to work when he was Fed chairman. During the financial crisis, he pioneered many of the emergency lending programs that were used during that crisis and then were dusted off again more recently during the pandemic downturn. Sharing the prize today, Douglas Diamond of the University of Chicago and Philip Dybvig of Washington University in St. Louis. They wrote an influential paper about the role that banks play as financial intermediaries, why it's so painful when they fail and steps that can be taken to prevent that.

INSKEEP: So what does their research show?

HORSLEY: Well, it shows that banks play a super important role. Of course, they take deposits from people who have extra money they don't need right now. And they lend it to people and businesses who do need the money to build houses and factories and businesses. And moving money around like that allows us to build a much more productive economy. The trouble is, there's a potential mismatch in timing. The people that put deposits in the bank want to be able to take their money out when they want to. And of course, the people who've got that money tied up in houses and factories and businesses aren't necessarily ready to hand it right over. This, of course, is the classic Jimmy Stewart scene in "It's A Wonderful Life"...

INSKEEP: Oh, yeah.

HORSLEY: ...When, you know, folks want to get their money out. And it's not here. It's in Joe's house and Bill's house. There are ways to avoid those bank runs. Deposit insurance helps, using the Fed as a lender of last resort and, of course, bank regulation. As we say, some of those lessons were put to work during the financial crisis of 2008 and '09 and again during the pandemic downturn. And that's why, as challenging as those episodes were, we did manage to avoid another 1930-style depression.

INSKEEP: What is the relevance now, then?

HORSLEY: Well, this is obviously not strictly academic. Poor Professor Diamond was woken up very early this morning and asked to opine to a roomful of reporters on all sorts of current economic challenges - high inflation, the recent financial turmoil in the U.K. He did his best to navigate this. He said that the commercial banking system is much better capitalized, much better protected now. But he also warned that financial crises can start in dark corners of the financial system. And it's very hard to have both liquidity and security.

(SOUNDBITE OF ARCHIVED RECORDING)

DOUGLAS DIAMOND: I think we will probably always be subject to low-probability, unexpected crises.

HORSLEY: But at least the research developed by today's Nobel Prize winners does give us some tools to deal with those crises.

INSKEEP: NPR's Scott Horsley. Always appreciate your insights, and good luck next year.

HORSLEY: (Laughter) Thanks so much to you. Transcript provided by NPR, Copyright NPR.

Steve Inskeep is a host of NPR's Morning Edition, as well as NPR's morning news podcast Up First.
Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.