Keeping the credit creation process intact by bailing out the large US banks was critical in fostering the subsequent recovery. Unlike many of his peers, Bernanke grasped what was at stake. Bank collapses involve losing valuable information about borrowers that cannot be recreated quickly. Banks best handle the credit creation process, but when they are weighed down by non-performing loans and a lack of capital, they cannot perform that vital role.
Congratulations to Ben Bernanke, Douglas Diamond and Philip Dybvig, this year’s Nobel laureates in the Economic Sciences. As the citation reads, the trio have “significantly improved our understanding of the role of banks in the economy, particularly during financial crises.”
Few of us in life, and vanishingly few economists, get to put their work into practice on the most crucial stage Bernanke did in 2008. The former chair of the US Federal Reserve (Fed) was not merely debating hypotheticals with his grad students. He made critical decisions under the most intense pressure. And there is no doubt that his understanding of the precise nature of the crisis saved the global financial system in 2008.
