Three US-based economists given NobelPrize for work on banks
Three scientists jointly won the prize in physics Tuesday.had shown that tiny particles can retain a connection with each other even when separated, a phenomenon known as quantum entanglement, that can be used for specialized computing and to encrypt information.
French author Annie Ernaux won this year's Nobel Prize in literature Thursday. The panel commended her for blending fiction and autobiography in books that fearlessly mine her experiences as a working-class woman to explore life in France since the 1940s. Diamond demonstrated how banks perform another societally important function. As intermediaries between many savers and borrowers, banks are better suited to assessing borrowers' creditworthiness and ensuring that loans are used for good investments.
We take for granted that these services function as they should, perhaps with the exception of brief technical problems. Sometimes, however, all or parts of the banking system fail and a financial crisis arises. Important banks collapse, borrowing becomes more expensive or impossible, prices plunge for property and other assets. If this progression is not stopped, the entire economy can enter a downward spiral of rapidly increasing unemployment and bankruptcies.
Before Bernanke published his article, the conventional wisdom among experts was that the depression could have been prevented if the US central bank had printed more money. Bernanke also shared the opinion that a shortage of money probably contributed to the downturn, but believed this mechanism could not explain why the crisis was so deep and protracted.
Society must somehow resolve these conflicts. If companies or households can be forced to repay their loans at any time, long-term investments become impossible. This would have devastating consequences. The economy cannot function without a financial system that creates enough readily accessible and secure means of payment. Imagine what would happen if you had to pay for your supermarket purchases with a claim on part of your house every time you went shopping.
Savers can use their deposit accounts for direct payments. The bank has thus created money, not from thin air but from the long-term investment projects to which it has lent money. Banks are sometimes criticised for creating money, but here we see that this is precisely why they exist.It is easy to see that maturity transformation is valuable to society, but the laureates also demonstrate that the banks' business model is vulnerable.
If the bank cuts corners on monitoring borrowers, it risks large losses on its loans. The bank would thus be unable to repay what it promised its depositors and collapse. Therefore, it is in the bank's own interest to monitor its borrowers without the depositors needing to monitor the bank.
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