The Nobel Prize in Economic Sciences was awarded Monday to former Federal Reserve chief Ben Bernanke and two other U.S. academics whose work helped governments and central bankers navigate the global financial crisis and avoid an economic depression of the kind seen during the 1930s.
Mr. Bernanke, who served as chairman of the Fed during the crisis, is currently a distinguished senior fellow at the Brookings Institution. His fellow recipients are Douglas Diamond, an economist at the University of Chicago, and Philip H. Dybvig, an economist at Washington University.
Announcing the prize, Stockholm University economist John Hassler said their research had proved invaluable during the 2008 crisis, which brought the global financial system to the brink of collapse.
"The laureates' work turned out to be important to understanding the crisis," Mr. Hassler said. "The measures that were undertaken rest on the ideas that we recognize today."
Speaking to reporters, Mr. Diamond said the award had taken him by surprise.
"I was sleeping very soundly, and then all of a sudden, off went my cellphone," he said.
The award to Mr. Bernanke cited a 1983 publication establishing bank failures as key to the transformation of an economic recession into the most severe depression of the 20th century.
"At the time, this was a break with the current view," said Mr. Hassler. "Banks fail, but it was thought that was a consequence of crisis, rather than the cause of crisis."
A quiet academic who spent most of his career studying the Great Depression and central banking at Princeton University and the Stanford Graduate School of Business, Mr. Bernanke rose to the forefront of policy making just as the U.S. was entering a potential replay of the subject he mastered from history books.
Historians now credit Mr. Bernanke for averting an economic calamity by quickly devising aggressive new monetary policies -- rock-bottom interest rates, loans to banks and controversial bond-buying programs -- during and after a financial crisis that started in 2007 and spanned nearly two years.
His mantra became that he would do "whatever it takes" to prevent an economic collapse, and in many respects he did. A recovery began about two years after the panic started and became the longest expansion in U.S. economic history.
But the slow recovery and unpopular bank bailouts made Mr. Bernanke a lightning rod for criticism, especially from his own Republican Party.
The award to Mr. Diamond and Mr. Dybvig also cited a 1983 paper that explained how banks play a crucial economic role as intermediaries between savers and the businesses they ultimately invest in through "maturity transformation."
But the paper showed that in taking short-term deposits and making longer-term loans, banks are "inherently vulnerable," Mr. Hassler said. Additional work by Mr. Diamond explained that banks monitor borrowers on behalf of savers and have a unique insight into businesses that can't quickly be replaced by newcomers if they go bust.
"When a bank fails, this knowledge disappears," Mr. Hassler explained. "That is why banking crises have long-lasting consequences."
With interest rates rising around the world, worries about the resilience of banks and other financial institutions have revived over recent months. Late last month, the Bank of England intervened in the market for U.K. government bonds to support the country's pension funds.
Mr. Diamond said regulators were "much better prepared" for threats to financial stability than they had been in advance of 2008, when "there wasn't a perception that there was a high level of vulnerability."