Dusseldorf Former US Federal Reserve Chairman Ben Bernanke and the two US economists Douglas Diamond and Philip Dybvig have been awarded the Alfred Nobel Memorial Prize for Economics, also known as the Nobel Prize in Economics.
The three researchers received it “for their work on banks and financial crises,” as the Swedish Academy of Sciences put it in the justification. Her research has made it easier to overcome financial crises.
The three US scientists have significantly improved our understanding of the role of banks in financial crises, the Academy continues. “The laureates’ work gives us better opportunities to avoid both serious crises and costly bailouts in the future,” added Nobel Committee Chair Tore Ellingsen.
However, the findings of the award winners at the time and the explanations given by the Academy today are based on an understanding of banking that, although it still populates many textbooks and underpins scientific articles, is now regarded by central banks as at least partially simplified and misleading.
Explaining the scientific achievements of the award winners, the Academy writes: “In order to understand why a banking crisis can have such enormous consequences for society, we need to know what banks actually do: They accept money from depositors and pass it on to borrowers .”
Money is not created when someone puts it in the bank
The Bank of England wrote about this theory, known in professional circles as “loanable funds”, in a widely acclaimed paper in 2014 entitled “Money creation in the modern economy”. It states: “This article explains how most of the money in the modern economy is created by commercial banks making loans. Money printing in practice differs from some common misconceptions – banks do not simply act as intermediaries, lending deposits from savers.”
The widespread belief that banks only lend money from depositors is ultimately the reason for financial crises, criticizes the former economist Peter Bofinger from the University of Würzburg the explanation and the decision of the academy. He is one of the textbook authors who already reproduce what the Bank of England writes in their textbooks.
The economist teaches at the University of Würzburg.
(Photo: private)
Bofinger explains his harsh criticism as follows: “The savers cannot create a credit bubble that causes too much money to circulate.” Only banks could do that by granting excessive credit. But this danger was not properly on the screen of the decision-makers because of a false monetary theory.
Accordingly, he comments ungraciously on the award: “It’s like honoring Ptolemy with the Nobel Prize in Physics for discovering that the sun orbits the earth.” But fortunately, he adds, the actual monetary policy is directed Today, central banks hardly ever act according to this theory.
The theory from the gold coin age
Just as if our money still consisted of a limited amount of gold coins, writes the Academy, without banks savers would have to invest their money directly in long-term projects. Banks emerged as a solution to this problem. “The bank offers accounts where households can deposit their money. She then lends that money to long-term projects.”
The Bundesbank expressly contradicts this view in its textbook “Money and Monetary Policy”: “The idea often arises that book money only arises when cash is paid into an account. However, this overlooks the fact that cash was previously withdrawn from an account. So the book money was already there. The question is therefore who creates the book money: It is the banks, for example when they grant loans.”
Long-term investment projects are thus financed by bank credit creation, not by deposits as in the Diamond and Dybvig model.
The winner of the Nobel Prize in Economics works at the University of Chicago.
(Photo: AP)
Nevertheless, in the credit creation model espoused by the Bank of England and the Bundesbank, Diamond, Gybvig and Bernanke’s conclusion that banks are vulnerable to so-called bank runs, in which so many depositors want to withdraw their deposits from the banking system as cash, is correct. that the banks become illiquid. This is because they typically hold only a fraction of the deposits in the form of cash or in the form of claims on the central bank that can be exchanged for cash.
However, while Diamond and Dybvig propose deposit insurance as the sole solution, which reduces bank customers’ risk of bankruptcy and thus the incentive to withdraw their money en masse, today this is only considered a necessary but far from sufficient part of the crisis avoidance strategy. Banks that are secured in this way can grow to dimensions that go beyond all security systems. A case in point is tiny Iceland’s megabanks, which went bust in the 2009 financial crisis.
“When banks create deposits through lending, the lender of last resort becomes important,” explains Bofinger. In this sense, since 2009, central banks have created bank claims on central banks on a massive scale by buying government bonds from them.
Bernanke’s research on financial crises was groundbreaking
Bernanke was honored primarily for his empirical research on the devastating economic consequences of banking crises and the mechanisms behind them. This is still considered groundbreaking today. The 69-year-old was Chairman of the US Federal Reserve from 2006 to 2014 and used historical data to show, among other things, how the “Great Depression” from 1929 also arose from the behavior of banks and companies.
Together with two other researchers, he also further developed the research to the effect that the view of the financial market is now standard in every economic model – this was not necessarily the case until the 1990s. The concept, known as the “financial accelerator”, significantly improves forecasts for economic and financial cycles, is still taken into account today and made it possible to show that recessions that are aggravated by a banking crisis are significantly deeper and more protracted.
Douglas Diamond, also born in 1953, is a professor at the University of Chicago, which is particularly often honored with the Nobel Prize in Economics. Philip Dybvig, who is two years his junior, teaches at the elite Yale University.
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