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Diamond and Dybvig and the Panic of 1907

My last post argued that, despite what Diamond and Dybvig’s famous theory suggests, bank runs have seldom proven fatal to otherwise sound banks. Instead, when people run on a bank, it’s usually because it’s already in hot water. In response to that post, a Twitter correspondent wondered whether the Panic of 1907—the proximate cause of the reform efforts culminating in the Fed’s establishment—was an exception to my claim, and therefore evidence of the inherent vulnerability...

Diamond, Dybvig, and Government Deposit Insurance

The 2022 Nobel Prize in Economics is to be shared by Ben S. Bernanke, Douglas W. Diamond, and Philip H. Dybvig, “for research on banks and financial crises.” Diamond and Dybvig are best known for their 1983 article, “Bank Runs, Deposit Insurance, and Liquidity,” in which they claim to have shown that purely voluntary bank deposit contracts cannot achieve the optimal degree of risk sharing in a world of uncertain consumption timing, but that the...

Bank and Crypto Runs: F(ac)TX vs Fiction

On October 10th, Douglas Diamond and Philip Dybvig won the Sveriges Riksbank Prize in Economic Sciences, sharing it with Ben Bernanke “for research on banks and financial crises.” According to the prize committee, Diamond and Dybvig’s research showed how the combination of borrowing short and lending long exposes even sound banks to runs, since the merest rumor  of a run can become “a self-fulfilling prophecy.” “These dangerous dynamics,” the committee wrote, “can be prevented through...

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