Bernanke Strikes Again

On Monday, October 10th, 2022, Ben Bernanke – alongside economists Douglas Diamond and Philip Dybvig – were announced as the winners of The Sveriges Riksbank Prize in Economic Sciences at the Nobel Prize Ceremony. They were awarded the prestigious accolade for their research on bank runs and proposed measures on their prevention.

Bernanke is no stranger to the field of banking; from 2006 to 2014, he served as the 14th Chairman of the Federal Reserve. He presided over the United States’ response to the Great Recession – one of the worst economic downturns in recent years – and also addressed the collapse of Lehman Brothers, which was one of largest banks in the world at the time with over $600 billion in assets. Before serving as Chairman of the Fed, Bernanke was a member of the Federal Reserve Board of Governors and taught economics at several renowned schools, such as the Stanford Graduate School of Business, Princeton University, and NYU.
Back to his monumental accomplishment, the bulk of Bernanke’s research that won him the award was conducted in the early 1980s when he collaborated with his fellow economists; they studied the conflict of when savers want instant access to their money following unforeseen circumstances, while borrowers need to know that they will not have to repay their loan prematurely. Their research indicated that the best solution to the conflict would be for banks to act as intermediaries, accepting deposits from savers and providing immediate access to those funds while offering long-term loans. However, this solution would make banks vulnerable to rumors about their collapse, and prove a costly weakness in their organization.

In the event of a bank run – in other words, when large numbers of depositors simultaneously withdraw their money from a bank out of fear that the institution will fail – the bank in question would collapse, wreaking havoc on the economy. A notable example of a bank run is the Schwenk Bank Run in 1914, when New York state regulators discovered fraudulent accounting and seized several of Ladislaus W. Schwenk’s banks; soon after, crowds of New Yorkers gathered outside of the banks and demanded their money. Fortunately, after the banks’ seizure, depositors got most of their money back, and the effects on the economy were negligible.

After analyzing their findings, Bernanke and Co concluded that providing deposit insurance and acting as a last-resort lender to banks was the most effective means of preventing bank runs. In their research, they also emphasized the grave consequences of bank runs, as Bernanke asserted that they were a significant contributor to the worsening of the Great Depression. When a bank failed it brought with it a trove of borrower information, which often took valuable time to recreate. As a result, society’s ability to direct savings toward productive investments was severely hampered.

To conclude, the research for which Bernanke and his colleagues were awarded the Nobel Prize in Economics was a crucial recognition as it places the role of banks and their consequences into perspective.