Too Big To Fail Concept - Essay Example

Task Too Big To Fail Introduction The “Too Big to Fail” concept is a theory that refers to the operations and activities of financial institutions in the American market. The concept asserts that some firms are too big and influential in the economy, such that their failure or collapse will have very negative effects to the economy of the country. These large firms are usually very complex and sophisticated, and due to the expansive nature of their operations across the economy, they pose a major risk in event of their failure. This is because numerous small firma and institutions depend on these big firms for the growth and development of their businesses, such as for the supply of their goods and services. In addition, these large financial firms control the backbone of the economy. Their failure would lead to a financial crisis that would affect members of the American society (Hughes and Mester 12). The concept of “Too Big to Fail” has two phases. The first phase is the positive effect that these large firms have on the economy. A large firm is very complex and organized, and as such, provides numerous economic opportunities to both the country and its citizens, such as employment, economies of scale, and better service delivery. On the other hand, it has a negative phase whereby their failure would bring down the economy to a standstill. For instance, all the small firms that depend on these big firms will also collapse, and their employees will be jobless. There would be no money flowing through the economy considering the economic crisis caused by the failure of these big firms. As such, the government takes necessary steps to eradicate these risks by supporting these big firms with a bailout whenever they are in crisis. However, they use taxpayers’ money, which is another burden to the country (Feldman and Stern 13). Articles Interpretation of the “Too Big to Fail” Concept The Freeman The Freeman newspaper article discussed the concept at one point in time whereby analysts argued over the inclusion of the concept in the banking sector. The introduction of the concept in 1984 to the economy of the United States and especially to the banking sector in the country emerged after the failure of the Continental Illinois. This failure led to a massive economic crunch in the country, and as such, the government took proactive steps to bail out the bank. By introducing the concept, the US government overlooked the reasons why the bank failed in the first place. As such, the concept only worsened the banking condition in the country, instead of the remedy it was to provide, as practitioners in the banking sector perceived it as wider system by the central banking to undermine the financial conditions within the banking system (Wheelock and Wilson171). “The “too-big-to-fail” doctrine is part of a wider system of central banking that undermines the financial condition of the banking system,” Richard Salsman, November 01, 1992: The Freeman. The Risk Magazine The Risk Magazine views the too big to fail concept as an alternative approach to waste taxpayers’ money. Analysts in this magazine argue that the economy can still cope with the failure of these big businesses without putting the taxpayers’ money at risk. It is not a guarantee that once the government injects in massive funds to support a failing business to get back to its feet, without removing the underlying footholds that led to its failure. This would be a waste of taxpayers’ money since the company or business would fail again in a similar situation, and still demand government’s support. On the contrary, the analysts suggest that the government should come up with prevention, rather than treatment measures in the approach of these companies (Haldane 18). “With these new rules in place, massive public bail-outs of banks and their consequences for taxpayers will finally be a practice of the past,” Cameron, Matt and Rennison Joe, January 10, 2014: Risk Magazine. The Reuters Analysts in this magazine argue that the “Too Big To Fail” banks are literally controlling the economy, and the government needs to take active measures at ensuring that they do not hold the economy at ransom. They suggest a number of solutions to tackling the problem at hand, in order to free the country of the financial crisis and economic problems related with the “Too Big to Fail” banks. “Broadly speaking, there are two ways to tackle this problem. One is to make big banks less likely to fail. The other is to reorganize them so that they can be allowed to fail without threatening the system,” Larsen, peter, December 23, 2010: Reuters, US edition. Possible Remedies for the Too Big To Fail Concept The “Too Big to Fail” concept within the American economy has to end. This is because of the numerous risks relating to it, especially the case where it holds the entire US economy at ransom. It is very risky for an entire economy to depend on a few large firms to control and manage its economic, and most especially its financial operations. This is because a financial crisis will affect every sector of the economy, and the entire market will come to its fall. Some of the major economic problems associated by the “Too Big to Fail” concept are an increased rate of unemployment, languishing of house prices, gyrating of stock markets, as well as, eminent bankruptcy of the government. This economically chaotic situation requires proper and quick remedy before the United States economy sinks to the bottom (Hughes and Mester 12). One strategic move of eliminating the “Too Big to Fail” concept is by setting up proper rules and regulations of the financial sector. These tight rules will ensure that these big financial institutions carryout their duties and activities in a manner that is safe and risk free to the economy, and eventually reduce their risk of failing. As such, the avoidance of failure of these big firms also eliminates the financial crisis that would arise in the event of their failure, as well as, the economic crush. Market regulators such as the Central Bank and Federal Reserve System should also ensure that the operations and activities of these big financial institutions adhere to the set rules and regulations, and as such, avoid any possibilities of a fall or collapse of these large financial institutions and banks (Feldman and Stern 13). In order to ensure proper adherence to market rules and regulations, these large firms need sound leadership and management. This means that the managers of these big financial institutions should of great integrity and professionalism, and should use their knowledge and experience in steering the firm towards growth and profitability, rather than to losses and collapse. This is a good way of eradicating the “Too Big to Fail” economic theory within the US economy. Good and sound leadership will propel a company to growth and prosperity, and as such, there would be no risk of such a firm failing because of its sound leadership. The selection of the executive team of these firms should be thorough and intensive to ensure only the best get an opportunity to serve country and economy. In addition, sound management will ensure that the company adheres t the set rules and regulations by market controllers, which ostensibly eradicates the risk of failure for these large firms (Wheelock and Wilson171). However, the best way to get rid of the “Too Big to Fail” concept is by eradicating the big companies from the United States economy. By this it means that the economy should grow and cultivate numerous other firms in the same market that have equal strength and capabilities instead of depending on a few firms whose failure would be detrimental to the economy. For instance, it is an obvious fact that below every big firm there are many small firms and institutions. These small firms and institutions also fail and collapse, and there effects to the economy are not that alarming as compared to the large firms. In addition, they do not get government support to revive their operations in case of a financial failure unlike the big firms. Therefore, expanding and developing these small firms to grow and rival the big firms is the best way to eradicate this concept (Haldane 18). Growth of these numerous firms and institutions will eliminate the financial risks associated by the failure of a big firm. This is because there would be numerous big firms operating in the economy. As such, the failure of one or two of these firms would not have any serious consequences or repercussions to the economy. The economy will continue to function properly even after the failure of these big firms, because there will be many others to fill in the void after their collapse. As such, the government will not have to waste precious taxpayers’ money on reviving these fallen heroes. The government will also not face an economic decline after the fall of these big firms. Citizens, on the other hand, will continue their lives as normal due to the insignificance of the failure of these firms. The only people or departments of the economy that would suffer by this failure would be the company itself, and its shareholders who risk losing their investments (Hughes and Mester 12). Recent Congress Activity to Remedy the Problem The Congress made several laws in 2010 to reform the financial system of the United States. These policies would facilitate creation of a free market for all participants in the economy, and as such, both big firms and small firms will do business on an equal platform. In addition, the bad blood between the big firms and the small firms owing to the sponsorship given to the big firms by the government in the event of their failure would fizzle away. This bad blood always spoils the market and turns the tides against big firms, making them more prone to failure and collapse. These policies also support the growth and development of numerous small firms to become big firms that have significant control to the economy. As such, there would be many firms to rely on in the event of a failure, and this failure would not lead to a financial crisis in the economy (Feldman and Stern 13). Work Cited Adelman, Bob. Ending “Too Big To Fail” Gaining Momentum? The New American, Friday, 20 April 2012. Retrieved from http://www.thenewamerican.com/economy/sectors/item/11098-ending-too-big-to-fail-gaining-momentum Cameron, Matt and Rennison Joe. Too-Big-To-Fail Problem Solved, Claim Leading Industry Figures. Risk Magazine, January 10, 2014. Retrieved from http://www.risk.net/risk-magazine/news/2321896/too-big-to-fail-problem-solved-claim-leading-industry-figures DeYoung, Robert. "How Big Should a Bank Be?" American Banker, April 17, 2012. Retrieved from www.americanbanker.com/bankthink/how-big-should-a-bank-be-community-scale-1048454-1.html Feldman, Ron and Stern Gary. "Addressing TBTF by Shrinking Financial Institutions: An Initial Assessment." Federal Reserve Bank of Minneapolis The Region, June 2009, pp. 8-13. Print. Fisher, Richard W. "Taming the Too-Big-to-Fails: Will Dodd-Frank Be the Ticket or Is Lap-Band Surgery Required?" Columbia Universitys Politics and Business Club, Nov. 15, 2011. Print Haldane, Andrew G. "The $100 Billion Question." Institute of Regulation and Risk, Hong Kong, March 30, 2010. Print. Hughes, Joseph and Mester, Loretta. "Who Said Large Banks Dont Experience Scale Economies? Evidence from a Risk-Return-Driven Cost Function." Federal Reserve Bank of Philadelphia Working Paper No. 11-27, 2011. Print. Larsen, Peter. “Too Big To Fail’ Will Get Partial Cure In 2011. Reuters, December 23, 2010. Retrieved from http://blogs.reuters.com/breakingviews/2010/12/23/too-big-to-fail-will-get-partial-cure-in-2011/ Mester, Loretta. "Optimal Industrial Structure in Banking." Federal Reserve Bank of Philadelphia, Working Paper No. 08-2, 2005. Print. Natural News. The Medical Cartel: Too Big To Fail, or Too Evil To Expose. Natural News May 5, 2013. Retrieved from http://www.naturalnews.com/too_big_to_fail.html ODriscoll Jr., Gerald P. "The Problem with ‘Nationalization. " The Wall Street Journal, Feb. 23, 2009. Retrieved from online.wsj.com/articles/SB123535183265845013 Reich, Robert B. "If Theyre Too Big to Fail, Theyre Too Big Period." Retrieved from http://robertreich.org/post/257309894 Salsman, Reynolds. Banking without the Too-Big-To-Fail Doctrine: The “Too-Big-To-Fail” Doctrine is Part of a Wider System of Central Banking That Undermines the Financial Condition of the Banking System. The Freeman, November 1, 1992. Retrieved From http://www.fee.org/the_freeman/detail/banking-without-the-too-big-to-fail-doctrine Wheelock, David and Wilson, Paul. "Do Large Banks Have Lower Costs? New Estimates of Returns to Scale for U.S. Banks." Journal of Money, Credit and Banking, February 2012, Vol. 44, No. 1, pp. 171-99. Print Wheelock, David. Too Big To Fail: The Pros and Cons of Breaking up Big Banks. Federal Reserve Bank of St. Louis, October 2012. Retrieved from https://www.stlouisfed.org/publications/re/articles/?id=2283 Read More