Note: The blog post below is a transcript of our podcast 'Eco Decode'. Head on over to Spotify (click here!) to listen to the podcast.
Hey everyone! This is Navya and welcome to the first ever episode of the my new podcast Eco Decode.
So this is your go to podcast for economics simplified in less than 10 minutes. Whether you are a student, professional or just want to know something new about the world around you, this podcast is for you. Today I’ll be kicking off my first series of podcast episodes:- Nobel Prize economics explained. We all know that the Nobel Prize in economics is awarded for revolutionary research in this field but there’s always a mist of confusion about what this research really was about. I feel that if something is groundbreaking enough to win a Nobel prize, then its contents should definitely be shared with more people. That’s exactly what I’ll be doing in my podcast’s first series. In each episode, we’ll understand the research done by Nobel prize winning economists of any one year. Wait, hold on, don’t worry, it wont be boring. You’ll be surprised to know just how much this research relates to things we all observe in our everyday life and I am going to try my level best to make this as interesting and engaging for you as possible. Are you ready? Let’s get started.
First of all, here’s a little introduction to the award that the next few episodes of this podcast are going to revolve around- the Nobel Prize in Economic Sciences or the Sveriges Riksbank prize in economic sciences. Incase you are wondering, Sveriges Riksbank is the name of Sweden’s central bank, which is apt because this awarded by the Royal Swedish Academy of Sciences. This is awarded in memory of Alfred Nobel, the founder of the Nobel prize.
Okay, so before I tell you the prize year we’ll be discussing today, think of something that unfortunately happened in both the 1930s and 2009?
You’re right, it’s financial crises and today’s Nobel prize winners did research on banks and their role in financial crises.
Today we’ll be talking about the 2022 Nobel prize, awarded to to Ben S. Bernanke, Douglas W. Diamond and Philip H. Dybvig.
We all know that banks perform the function of borrowing and lending money, but this research has revealed that they also play a very important role in financial crisis situations. Before this research was published in the 1980s, many people attributed the causes of the exacerbation of the great depression in the 1930s to thoughtless and rash investments and a huge expenditure on infrastructure. Due to Diamond, Dybvig and Bernanke’s work, it is now commonly accepted that the role of banks and their control over money supply was also an imperative factor. The theory of maturity transformation by Diamond and Dybvig showed that a bank using demand deposits to fund long-term projects is the best arrangement, but that, at the same time, this arrangement has a big problem: bank runs may arise. Bank runs arise when too many borrowers ask to withdraw their money from a bank at once and this can create a plethora of problems. On a lighter note, if you ever saw the classic Disney movie, Mary Poppins, you are already familiar with the concept of bank runs. When little Michael shouted that the bank wasn’t returning his tuppence, it lead everyone else to ask for their money back too. This was a dramatisation, but essentially the concept is the same. The theory of a bank’s provision of delegated monitoring services by Diamond showed that banks can ensure that projects with high (but risky) long-run returns obtain funding by monitoring borrowers on behalf of lenders.
Bernanke added that financial intermediation is key for real activity. Evidence and empirical data from the Great Depression show that bank runs had major real and long-run economic consequences. Bank runs can ruin the relationship that banks have with borrowers and this can lead to a severe credit crunch that affects household and small businesses among others. So it is imperative that banks don’t fail in financial crises. However, there has been some criticism towards Ben Bernanke because of his policies as chairperson of the federal reserve during the 2007-2009 financial crisis.
Government policies, such as insuring deposits or a central bank acting as a lender of last resort, can definitely help in reducing bank runs according to Diamond and Dybvig.
So now you why Ben S. Bernanke, Douglas W. Diamond and Philip H. Dybvig became 2022’s Nobel laureates.
As we end our first episode, I’d like to leave you all with a thought, today’s laureates published their research in the 1980s and were awarded Nobel prizes nearly 40 years later. So, here’s your reminder to keep going and sooner or later the results will follow.
Works Cited
“FINANCIAL INTERMEDIATION AND THE ECONOMY.” Nobel Prize, 10 October 2022, https://www.nobelprize.org/uploads/2022/10/advanced-economicsciencesprize2022.pdf. Accessed 1 July 2023.
“The Prize in Economic Sciences 2022 - Press release - NobelPrize.org.” Nobel Prize, 10 October 2022, https://www.nobelprize.org/prizes/economic-sciences/2022/press-release/. Accessed 1 July 2023.
“Why Bernanke, Diamond and Dybvig won the Nobel Prize in Economics.” Finshots, 12 October 2022, https://finshots.in/archive/why-bernanke-diamond-and-dybvig-won-the-nobel-prize-in-economics/. Accessed 1 July 2023.