Too Big to Fail
Candlefocus EditorThe term gained notoriety after the near-collapse of Bear Stearns and Lehman Brothers in 2008. In order to prevent the financial system, which was on the brink of collapse, the U.S. government stepped in and enacted the Emergency Economic Stabilization Act of 2008. This Act included the Troubled Asset Relief Program (TARP), which authorized the inflow of $700 billion into the banking system. This money was then used to purchase securities and other distressed assets to stabilize the financial markets.
The concept of too big to fail has been applied to many industries, including banking, insurance and health care. This is due to their critical role in providing capital and health services to consumers. Because of their interconnectedness, the failure of any of these sectors would disrupt the economy. As such, governments often intervene in order to prevent a collapse.
Conversely, some experts argue that the concept of too big to fail encourages excessive risk-taking and complacency on the part of executives of large companies. By relying on the notion that they are too interconnected to their industries to fail, and that their bail-outs will be subsidized by taxpayers, corporations can increase the amount of debt they assume and the level of risk they take. This poses a moral hazard, as those executives are not incentivized to be responsible in their decisions.
In conclusion, “Too Big to Fail” has become a well-recognized term to describe certain large companies, institutions and sectors whose collapse could have a devastating effect on the economy. The 2008 Financial Crisis saw the U.S. government intervene in order to prevent a systemic collapse. The concept has its benefits and its drawbacks, and will likely always be an important part of the business and economic sector.