Three economists win the Nobel for their work on bank runs

When the global financial crisis struck 15 years ago, economists were forced to respond to criticism that they had, for decades, ignored the banking system. With its choices for this year’s Nobel prize, Sweden’s Royal Academy of Science honoured three economists who had, in fact, spent the previous decades examining banking instability. Research by Ben Bernanke, chair of the Federal Reserve during the crisis (and an academic before that), Douglas Diamond of the University of Chicago and Philip Dybvig of Washington University in St Louis was largely vindicated by the failure of the banks in 2008.

The three laureates’ central insight was that banks were not the neutral intermediaries between savers and borrowers that other economic models had assumed. Instead, they offer vital services to the wider economy: gathering information on borrowers, providing a liquid means of saving and deciding to whom to extend credit. From this insight flows an important conclusion: because banks…

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This article was written by and originally published on www.economist.com