“The actions taken by central banks and financial regulators around the world to deal with two major recent crises – the Great Recession and the economic crisis generated by the COVID-19 pandemic – were largely motivated by the investigations of the laureates,” the Swedish Academy said Monday in announcing the winners.
Governments around the world bailed out banks in 2008 and 2009, drawing an outpouring of criticism as consumers suffered and many lost their homes while banks, among the main culprits in the crisis, were bailed out.
But society at large benefited and the bailouts, while morally questionable to some, likely prevented further pain, the laureates’ research suggests.
“While these bailouts have problems, … they could actually be good for society,” Diamond, a professor at the University of Chicago, told a news conference, arguing that preventing the collapse of investment bank Lehman Brothers would have made the crisis less severe.
“It probably would have been better if Lehman Brothers hadn’t unexpectedly gone under,” Diamond said. “If they had found a way, I think the world would have had a less serious crisis.”
Ironically, Bernanke was the chairman of the US Federal Reserve at the time of the Lehman bankruptcy in 2008, which became one of the main catalysts for the world’s biggest financial turmoil since the 1930s.
Bernanke, now a fellow at the Brooking Institution, argued then that there was no legal way to save Lehman, so it was best to let it go bankrupt and use the government’s financial resources to avoid broader systemic failures.
Part of that response, including ultra-low interest rates and massive asset purchases by central banks, is being reversed now that inflation is at its highest level in nearly half a century in many parts of the world.
