MARY LOUISE KELLY, HOST:
All right. To other news - former Federal Reserve Chairman Ben Bernanke was awarded the Nobel Prize today along with two other economists. The three were honored for their research on the important role that banks play in the economy and how to protect that function during times of economic stress. It's research that was put to the test with trillions of dollars and the global economy on the line during the financial crisis of 2008 and '09. NPR's Scott Horsley reports.
SCOTT HORSLEY, BYLINE: You might not think much about it when you visit the ATM or log in to your bank account, but banks are important middlemen in the modern world. By taking deposits from people with extra cash and lending it out to those who need money, banks help to foster a more productive economy. Trouble can occur, though, when depositors get spooked and a lot of people want to pull their money out of the bank on short notice.
(SOUNDBITE OF FILM, "IT'S A WONDERFUL LIFE")
UNIDENTIFIED ACTOR #1: (As character) I need money.
UNIDENTIFIED ACTOR #2: (As character) How am I going to live until the bank opens?
UNIDENTIFIED ACTOR #3: (As character) I got doctor bills to pay.
UNIDENTIFIED ACTOR #4: (As character) I need cash.
HORSLEY: As Jimmy Stewart famously explained in "It's A Wonderful Life," those deposits may not be readily available because they've been invested in long-term assets like houses, factories or businesses.
(SOUNDBITE OF FILM, "IT'S A WONDERFUL LIFE")
JAMES STEWART: (As George Bailey) You're thinking of this place all wrong, as if I had the money back in a safe. The money's not here. Well, your money's in Joe's house - that's right next to yours - and in the Kennedy house and Mrs. Maitland's house and a hundred others.
HORSLEY: As an economics professor, Ben Bernanke studied the history of bank failures during the 1930s, when he argues the Federal Reserve didn't do enough to protect the financial system.
(SOUNDBITE OF ARCHIVED RECORDING)
BEN BERNANKE: About a third of all the banks - thousands of banks - in the United States failed. And that collapse of the banking system was a major factor explaining why the Depression was as deep and as long as it was.
HORSLEY: As Bernanke recalled in a series of videos for the Federal Reserve Bank of Philadelphia, he was determined not to make the same mistake as Fed chairman when the financial crisis struck in 2008. His scholarship was the basis for trillions of dollars in emergency lending by the Fed, using untested mechanisms to prop up the financial system.
It wasn't without controversy. Some complained banks were being bailed out while ordinary borrowers were not. Others warned the Fed's easy money policies would trigger runaway inflation. Still, in awarding the Nobel Prize today, John Hassler of the Royal Swedish Academy of Sciences says the central bank's aggressive lending helped to avoid a deeper financial meltdown. Bernanke's successors at the Fed relied on the same playbook during the financial turmoil triggered by the pandemic.
(SOUNDBITE OF ARCHIVED RECORDING)
JOHN HASSLER: Even though the financial crisis had large consequences, neither that nor the COVID pandemic led to depressions like in the '30s.
HORSLEY: Bernanke shares the award and nearly $900,000 in prize money with two other economists - Douglas Diamond of the University of Chicago and Philip Dybvig of Washington University in St. Louis. Diamond got the good news very early this morning in a phone call from Stockholm.
DOUGLAS DIAMOND: I was sleeping very soundly, and then all of a sudden, off went my cellphone.
HORSLEY: Diamond told reporters that commercial banks are better prepared now to weather an economic downturn than they were 15 years ago. For example, they're required to carry a bigger cash cushion than they were in 2008 and '09.
DIAMOND: Recent memories of that crisis and improvements in regulatory policies around the world have left the system much, much less vulnerable.
HORSLEY: But Diamond cautions that potential bank-style runs are still lurking in more opaque parts of the financial system. Just two weeks ago, the Bank of England was forced to step in and calm financial markets after a proposed tax cut by the British government triggered a sell-off in the bond market. Diamond says regulators and policymakers can impose all kinds of safeguards, but given the mismatch between short-term savings and long-term investments, there will always be some inherent risk.
Scott Horsley, NPR News, Washington. Transcript provided by NPR, Copyright NPR.
