Column of Gonzalo Islas: Mary Poppins and the Nobel Prize – La Tercera

What do they have in common Mary Poppins, the remembered Walt Disney film, with the recent winners of the Nobel Prize in Economics? More than you might think. One of the most famous scenes in Mary Poppins That’s when Mr. Banks takes his kids to see his workplace, Fidelity Fiduciary Bank, and gives them a coin to open their first savings account. His son’s refusal to deliver his currency on deposit to the president of the bank unleashes panic among customers and generates a bank run, an occasion in which hundreds of savers ran to the bank tellers to withdraw their deposits, while employees tried to close the doors.

The scene reflects something not very different that occurred historically during banking crises. In fact, in Chile we experienced similar scenes during the 1983 crisis, when depositors lined up to withdraw their investments in mutual funds.

Precisely in 1983, Douglas Diamond and Philip Dybig published their work “Bank runs, deposit insurance and liquidity”, in which they developed a model that, using game theory tools, shows how the financial intermediation solution offered by banks, allowing that depositors can access their money while offering longer-term loans to their debtors is fragile, and that bank runs can become self-fulfilling prophecies. These authors also showed how mechanisms such as deposit insurance and state intervention can help avoid a damaging balance for the economy.

Ben Bernarke, the third Nobel laureate, has spent much of his academic career studying financial crises from a historical perspective. In particular, his work showed how the more than 9,000 bank failures in the US during the 1930s sharpened and deepened the financial crisis of 1929, giving rise to the Great Depression. Years later, in 2008, he had to face one of the financial crises from the position of president of the US Federal Reserve. His years of study in this matter were behind many of the policies implemented in that period, in particular in the policy of bailouts and support for financial institutions, which, according to Bernarke, prevented the crisis from subprime it will become an economic cataclysm, although as he himself recognized in 2010, history is never a perfect guide.

Today we no longer see customers crowding the doors of banks during financial crises, technological development means that runs take place in virtual spaces. However, the lessons of Diamond, Dybig and Bernarke remain valid. As the last of them indicates, the health of the financial system and the general performance of an economy are strongly interconnected, both in the short and long term, and are also sustained not only by an adequate regulatory and supervisory framework, but also also, ultimately, on the confidence that the participants themselves have in it.

By Gonzalo Islas Dean Faculty of Engineering and Business University of the Americas

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Column of Gonzalo Islas: Mary Poppins and the Nobel Prize – La Tercera