Most Nobel laureates develop theories; Ben Bernanke puts his into practice

Critics sometimes ask what good practical economic theory has done. The Nobel Prize in Economics awarded to Ben Bernanke on Monday with Douglas Diamond from the University of Chicago and Philippe Dybvig from Washington University in St. Louis provides a rejoinder. The winners have independently developed the theoretical underpinnings of why banks exist and why bank runs hurt. Bernanke put those theories into practice when the stakes could hardly have been higher: as chairman of the Federal Reserve during the global financial crisis of 2007-09.

All of finance faces a problem known as « information asymmetry »: borrowers know more about their creditworthiness than lenders. Savers cannot undertake all due diligence necessary to determine who is a safe borrower. Moreover, they often want to be repaid without notice, before the borrower’s project pays off.