Former Fed chief Ben Bernanke wins Sweden’s Nobel Economics prize

A trio that included Ben Bernanke, former head of the US Federal Reserve, on Monday won the Nobel Economics Prize for research on banking's role in avoiding collapses during financial crises.

Former Fed chief Ben Bernanke wins Sweden's Nobel Economics prize
Tore Ellingsen, Hans Ellegren and John Hassler present his year's Economics Prize. Photo: Anders Wiklund/TT

Bernanke, together with Douglas Diamond and Philip Dybvig, were honoured for having “significantly improved our understanding of the role of banks in the economy, particularly during financial crises, as well as how to regulate financial markets,” the jury said.

“Their analyses have been of great practical importance in regulating financial markets and dealing with financial crises,” it added.

Bernanke, 68, the chair of the US Federal Reserve between 2006 and 2014, was highlighted for his analysis of “the worst economic crisis in modern history” — the Great Depression in the 1930s.

Diamond, a professor at the University of Chicago born in 1953, and Dybvig, 67, a professor at Washington University in St. Louis, were in turn honoured for showing how “banks offer an optimal solution” for channelling savings to investments by acting as an intermediary.

The pair also showed how these institutions were vulnerable to so called banks runs.

“If a large number of savers simultaneously run to the bank to withdraw their money, the rumour may become a self-fulfilling prophecy — a bank run occurs and the bank collapses,” the Nobel Committee said.

The committee added that this dangerous dynamic can be avoided by governments providing deposit insurance and giving banks a life-line by becoming a lender of last resort.

“The laureates’ insights have improved our ability to avoid both serious crises and expensive bailouts,” Tore Ellingsen, chair of the Committee for the Prize in Economic Sciences, said.

“In a nutshell, the theory says that banks can be tremendously useful but they are only guaranteed to be stable if they are properly regulated”, he added.

Of all the Nobels, the economics prize has the fewest number of female winners, just two since it was first awarded in 1969 — Elinor Ostrom in 2009 and Esther Duflo in 2019.

‘False Nobel’

The economics prize, set up by the Swedish central bank, was the only award absent from the original five created by scientist Alfred Nobel, sometimes earning it the moniker of “false Nobel”.

But like the other prizes it comes with a medal and an award sum of 10 million Swedish kronor (around $900,000).

The winners will receive the prize from King Carl XVI Gustaf at a formal ceremony in Stockholm on December 10, the anniversary of the 1896 death of scientist Alfred Nobel who created the prizes in his last will and testament.

Last year, the honour went jointly to Canada’s David Card, Israeli-American Joshua Angrist and Dutch-American Guido Imbens for research that “revolutionised” empirical work in their field and brought better understanding of how labour markets work.

The Economics Prize also closes this year’s Nobel season which on Friday saw the Peace Prize handed out to Russian rights group Memorial, Ukraine’s Center for Civil Liberties which is documenting “Russian war crimes” against the Ukrainian people and detained activist Ales Bialiatski of Belarus.

On Thursday the literature nod went to French author Annie Ernaux.

The Medicine Prize kicked off the season, going to Swedish paleogeneticist Svante Paabo, who discovered Neanderthal DNA and the previously unknown Denisova hominin.

The Physics Prize then honoured Alain Aspect of France, Austria’s Anton Zeilinger and John Clauser of the United States for their discoveries in the field of quantum entanglement.

Another trio, Carolyn Bertozzi and Barry Sharpless of the United States together with Morten Meldal of Denmark won the Chemistry Prize, for their work on so called click chemistry.

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Riksbank deputy ‘open to reconsidering raising rates in April’

Martin Flodén, the deputy governor of Sweden's Riksbank, has questioned whether the central bank needs to bring in further rate rises in April, following bank runs on two niche banks in the US and a crisis of confidence at Credit Suisse.

Riksbank deputy 'open to reconsidering raising rates in April'

Uncertainty in the financial market following bank runs in the US and a crisis at Swiss bank Credit Suisse could have changed the playing field, he told TT in an interview. 

“It affects which level the key interest rates need to be in order to have a contractive effect,” he said, referring to the recent days of financial market turbulence. “We can’t just look at key interest rates by themselves. It’s the key interest rate in combination with all of these developments which determines how tight financial policy will be.”

He said it was not yet obvious what decision should be taken. 

“It’s clear that monetary policy needs to stay tight, but what level of interest is that? We need to assess all of the current developments there.” 

‘Could go in different directions’

In theory, there could be such a serious financial crisis, with such a severe effect on lending and banks’ financing costs, that the central bank would be forced to adopt supportive measures, even lowering the key rate.

Flodén doesn’t think Sweden is in that situation, although he thinks there’s a possibility it could happen.

“It’s not something I can see happening right now, at least, although this could go in different directions.” 

He added that he doesn’t see any reason for any “special concern”, toning down the risk that a crisis for two smaller niche banks in the US and at Credit Suisse could affect the Swedish financial system.

“Of course, it could lead to some stress, but there aren’t actually any particular signs in Sweden, which are worrying me,” he said. 

Flodén is one of six members of the Riksbank executive board, led by Riksbank chief Erik Thedéen, responsible for making a decision on whether interest rates will go up again at the end of April.

The Riksbank has indicated that a rate hike of between 0.25 and 0.5 percent from the current 3 percent rate could be necessary.

Flodén described the most recent inflation statistics for February, where inflation unexpectedly rose to 12 percent, as “not good at all”. So-called KPIF inflation, where the effect of mortgage rates is removed, rose from 9.3 percent to 8.7 percent in January. The Riksbank’s goal is 2 percent.

“It’s clear that inflation is still far too high and that monetary policy needs to be focussed on combatting inflation,” he said, adding that inflation statistics for March will be released before the central bank is due to make a decision on whether to raise rates or not in April.