When an economy collapses, that country’s banks tend to fail. But the opposite is also true: Bank failures can cause economic collapse.
Driving the news: That central insight was awarded this year’s economics Nobel prize. The winners are Ben Bernanke, Douglas Diamond, and Philip Dybvig.
Why it matters: Bernanke was able to put his theory into practice as chairman of the Federal Reserve during the financial crisis of 2008-9.
- By using extraordinary powers to prevent a broad wave of bank implosions, Bernanke prevented the Great Recession from becoming a second Great Depression.
What they’re saying: “Bernanke believed that it was critical to rescue the banks and the shadow banks,” writes George Mason economist Alex Tabarrok, “not because he was beholden to financial interests (he was not a Wall Street guy) but because he believed the banks were a critical bridge between savers and investors and if that link were broken the results would be catastrophic.”
Go deeper: Nobel Prize winners press release
