For a journalist, it is hard to digest the news of the Nobel prize in economics shared by a person under whose watch the grave financial crisis originated in 2007-08 in the US. The crisis shook the world, destabilised the economies of many states and affected the lives and livelihoods of millions across the globe.

Recently the Royal Swedish Academy of Sciences awarded Sveriges Riksbank Prize in Economic Sciences 2022 in memory of Alfred Nobel to three US economists — Ben S Bernanke, Douglas W Diamond and Philip H Dybvig for research on banks and financial crises.

The prize seems to have endorsed policies of massive controversial bailouts to banks, brokerage firms and insurance companies in the US, which later findings revealed, colluded for unearned profits, with auditing and credit rating firms looking the other way.

It is a historical fact, not contested by Ben Bernanke that the US Federal Reserve did next to nothing to force corrections before giant US firms collapsed like a house of cards, kickstarting a crisis that enveloped the whole world. It has yet to recover fully 13 years on.

The Nobel prize in economics seems to have endorsed policies of controversial bailouts to banks in the US

Lehman Brothers failed, Merrill Lynch sold itself to Bank of America, and AIG sought a $40 billion lifeline from the Federal Reserve (Fed), among many others. A group of US economic journalists documented the unholy nexus of the rich, successful and greedy actors in the saga. Their findings also hinted at commission and omission by top politicians and technocrats.

Many Pakistani economists approached for comments chose to keep their views to themselves. Those who shared their thoughts did not see an issue with the decision of the Nobel Committee and acknowledged the policy intervention that thwarted run on the banks that could have much worse economic consequences in the US and beyond. They discounted Ben Bernanke’s confession of negligence before the US Senate Committee in 2009.

The Fed’s oversight of bank holding companies was disastrously insufficient. Making a case for his second term as head of the Fed in December 2009, Ben Bernanke admitted that Fed made mistakes in the run-up to the financial crisis but defended his subsequent acts to contain the crisis, calling those steps’ prompt and forceful’.

Dr Rashid Amjad, Professor at Lahore School of Economics and former Vice-chancellor of the Pakistan Institute of Development Economics (PIDE) found the Nobel recipient deserving.

“Bernanke’s earlier path-breaking research on the failure of banks and the banking system in leading and accentuating the 1928 Great Depression merit recognition. It equipped him well as Fed’s head to play a proactive role in stemming the global financial meltdown in 2008 by providing badly needed support to major banks to save them from collapsing, though there were no ideal prescriptions to follow.

“To my mind, the real lesson from his nomination, which I support, is the recognition of the importance of studying economic history. This has, in recent years, been pushed out of mainstream economics and replaced by market fundamentalism by neo-liberals as the panacea of all economic ills. We also must rectify this approach in our current undergraduate and post-graduate economic courses taught in Pakistan”.

Sharing his views, Dr Ishrat Hussain, former governor of State Bank and ex-dean of the Institute of Business Administration, said, “Bernanke, Diamond and Dybvig have made significant contributions in the area of financial stability. Their research has shown that banks’ vulnerability to simultaneous withdrawals of deposits in response to panics can lead to runs on the banks, and bank collapses can be averted through deposit insurance schemes.

“These schemes, in fact, now form an integral part of financial sector infrastructure almost everywhere. In actual practice, it helped reduce the incidence of bank runs and systemic risk to the banking sector”.

The Royal Swedish Academy of Sciences believes this year’s laureates improved understanding of the role of banks in an economy and why it is vital to avoid their collapse that can exacerbate a financial crisis. The foundation of this research was laid by the three selected economists in the 1980s.

Justifying their choice, the Nobel Committee stated: “For the economy to function, savings must be channelled to investments. However, there is a conflict here: savers want instant access to their money, but businesses and homeowners need to know they will not be forced to repay their loans prematurely. In their theory, Diamond and Dybvig show how banks offer an optimal solution to this problem. By acting as intermediaries accepting deposits from many savers while providing long-term loans to borrowers.

“However, their analysis also showed how the combination of these two activities makes banks vulnerable to rumours about their imminent collapse. These dangerous dynamics can be prevented through the government providing deposit insurance and acting as a lender of last resort to banks.

“Diamond demonstrated how banks perform another societally important function. As intermediaries between many savers and borrowers, banks are better suited to assessing borrowers’ creditworthiness and ensuring that loans are used for good investments.

“Ben Bernanke analysed the Great Depression of the 1930s, the worst economic crisis in modern history. Among other things, he showed how bank runs were a decisive factor in the crisis becoming so deep and prolonged. When the banks collapsed, valuable information about borrowers was lost and could not be recreated quickly. Society’s ability to channel savings to productive investments was thus severely diminished.”

Published in Dawn, The Business and Finance Weekly, October 31st, 2022