CHICAGO (CBS) -- University of Chicago professor Douglas W. Diamond is one of this year's three winners of the Nobel Prize in Economics.
Diamond won the prize along with former Federal Reserve Chairman Ben Bernanke – now of the Brookings Institution – and Philip Dybvig of Washington University in St. Louis. They all won the prize for their research on banks and financial crises.
In a video supplied by the U of C, Diamond said he woke up to a surprise Monday morning.
"I was sleeping and lying in bed, and all of a sudden, my cellphone started to ring – and I was a little disoriented; picked it up, and a Swedish voice asked if it was me. I said it was, and they said they had some good news. I had to wake up some more, and then a couple, three members of the Nobel Prize Committee in Economic Science got on the phone," Diamond said, "and it was clear to me then that I wasn't being pranked by one of my friends."
Diamond is the Merton H. Miller Distinguished Professor of Finance Distinguished Service Professor of Finance at the U of C's Booth School of Business. The U of C said Diamond's research has "changed the way people view banks and laid the groundwork for how central bankers, regulators, policymakers, and academics approach modern finance."
The Nobel Award Committee pointed out that Diamond's research has helped create the modern understanding of why we need banks, and how the collapse of banks can fuel a financial meltdown.
"Professor Diamond has made extraordinary contributions to the field of economics and our collective understanding of the role financial institutions play in society, particularly in times of financial crises," University of Chicago President Paul Alivisatos said in a news release. "This is a well-deserved recognition of his groundbreaking scholarship."
Diamond is known in particular for his research on financial intermediaries, financial crises, and liquidity. For the past 40 years, the U of C said, he has been focused on research to explain "what banks do, why they do it, and the consequences of these arrangements," the U of C said.
Diamond and Dybvig worked together to create a model showing how banks that specialize in creating liquid liabilities, or deposits, to fund illiquid assets such as business loans, might wind up being unstable in a way that leads to bank runs, the U of C said.
"The goal of my research is to understand why banks and the financial system as a whole choose to set themselves up in a way where people think there's going to be a run on them. They're right. There will indeed be a run on them," Diamond explained to CBS 2's Jim Williams Monday. "They have to worry about the fear of fear itself."
The Diamond-Dybvig model has been used to understand phenomena resembling bank runs in markets during financial crises, the U of C said.
"Phil Dybvig and I had the idea when we did our research that it could have some impact on the way that central bankers and regulators around the world thought about the financial system, about banks, about deposit insurance stability," Diamond said in the news release, "so given that those issues of stability in the financial system are still very important, I'm very happy this was acknowledged."
Diamond's work with regard to banks and borrowing was cited in the Nobel announcement. Diamond has noted the role of banks as intermediaries between savers and borrowers – as banks assess borrowers' creditworthiness and how likely their investments are to succeed.
To avoid and respond to financial crises, "the best advice is to be prepared for making sure that your part of the banking sector is both perceived to be healthy and to stay healthy and respond in a measured and transparent way to changes in monetary policy," Diamond said in a news conference hosted by the Royal Swedish Academy of Sciences.
Diamond joined the U of C faculty in 1979. He is the 95th scholar associated with the U of C to receive the Nobel Prize, and the 33rd to receive the Nobel in Economics.
The U of C's track record for winning Nobel Prizes is due in no small part to its strength in business and economics, Diamond noted. He also emphasized the importance of peer review in academic research.
"We all take each other's work very seriously. About a third of those 95 prizes are actually in economics – and economics is a new prize; only started in the last 1960s. So economics and finance – which is the type of economics that I do – is like a very special thing around the University of Chicago, and the Booth School of Business where I am, we have really top researchers here, and we all take each other's work seriously," Diamond told CBS 2's Williams. "So when I write a paper, my colleagues read it carefully, and tell me the 10 stupidest things that I did in there. And I do the same for them, and when we're done, hopefully, there's nothing stupid left in it."
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