Too Big to Fail

Too Big to Fail
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Too Big to Fail
The colloquial ‘Too Big to Fail’ is a term used particularly to describe some specific financial institutions which are very large and very interconnected such that their failure is widely considered to be disastrous to the nation’s economy, and which therefore, need to be supported by the government in case they face economic difficulty (Sorkin 12). ‘Too Big to Fail’ also refers to the notion that a business has become extensively big/large and ingrained in the country’s economy that the government would provide financial assistance to prevent it from failing. This is because of the belief that if a large company fails, it will definitely have a catastrophic ripple effect throughout the economy. This paper discusses the ‘Too Big to Fail’ problem, and provides some possible remedies for it. It also discusses and compares those possible remedies and identifies which among them is the best. Moreover, the paper describes any recent acts of Congress in helping to remedy the problem.
The problem
The chief cause of the ‘Too Big to Fail’ (TBTF) problem in the United States is the fact that the financial system as it exists currently, the failure of large and complex financial institutions generate large and undesirable externalities. These mainly include disruption/interruption of the stability of the financial system and its ability of providing credit as well as other essential services to businesses and households (Sorkin 23). When this occurs, the financial sector gets disrupted and its troubles flow over into the real economy. There are several negative externalities linked with failure of any financial institution, and they are excessively high in the case of complex, interconnected and large institutions. However, the magnitude/scale of these externalities of does not only depend on size. It also depends on the degree/extent of interconnect...