Nobel Prize in Economics 2022

If you want to understand geology, study earthquakes. If you want to understand economics, study the Depression.”

Ben Bernanke.

Last week, the 2022 Nobel Prize in Economics was announced, awarding the prize to economists Douglas W. Diamond and Philip H. Dybvig, as well as Ben S. Bernanke, according to the Nobel Prize committee, “for having significantly improved our understanding of the role of banks in the economy, especially during financial crises, as well as how to regulate financial markets.

In the case of the first two, the model that bears his name tries to explain the reasons behind the financial runs that, in conditions of instability and uncertainty, can affect banks and that are the result of the mismatch between the liquidity of the liabilities of a bank (of the deposits it receives from the investing public), with the duration of its assets (typically related to debt of individuals and companies, which by its nature is longer term). This model has influenced both the financial structures of banks and their regulatory mechanisms, although evidently the validity of the model has been questioned in the face of later scenarios of more complex and profound volatility such as those that occurred in the 2008 crisis.

As in many other cases, this economic model has shown its limits to explain and limit the possible mechanisms of banking crisis, as well as for the implementation of public policies that fully prevent financial crises, as has been shown by various financial crises that have occurred since its appearance, in multiple countries of the world.

For his part, Bernanke was specifically awarded for his analysis of the elements that contributed to the generation and prolongation of the Great Depression of the 1930s, combining statistical analysis and research from historical sources, to show how the financial runs that caused the failure of the system Banking played a decisive role in deepening and prolonging the Great Depression.

His vision helped to focus on the relevance of protection mechanisms within banks (for example, in terms of capital reserves) and on the construction of better-designed regulatory mechanisms for banking operations. To a large extent, the failures in the regulation that lost sight of the risks associated with the contagion of financial runs, broadly speaking, explains the inappropriate decisions in the US financial system that led to the 2008 crisis.

Some have sought to disqualify the validity of Bernake’s award by questioning his role during the 2008 financial crisis as chairman of the Federal Reserve Bank. Today, the role of monetary policy is being questioned, and particularly decisions related to the generation of liquidity, which are considered to still affect the world economy.

Two aspects should be mentioned in this regard: First, the prize is awarded specifically for his studies on the Great Depression, which to date continue to serve as a starting point for discussing crisis phenomena linked to the operation of the financial system, not in his role as a Federal Reserve official. And second, for those of us who remember the conjuncture of the 2008 crisis, it is evident that Bernake acted by making short-term decisions, in an extraordinarily complex environment, which made it possible to avoid further contagion and, even when certain decisions had negative effects on In the long term, it is evident that the containment was achieved in a relatively short time, quite the opposite of the Depression of 29.

raul@martinezsolares.com.mx

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Nobel Prize in Economics 2022