Too Big to Fail Theory - Essay Example

Too big to fail Too big to fail is a theory about financial s. It asserts that some s are big: a failure in one of its operations affects the economy of the country. It is highly controversial, and the government is trying hard to solve this. Small companies always depend on large companies for growth. They are their suppliers of products. A failure in a large company shall pass the same problem to a small company. This shall have an effect in the economy, and the government comes in for help. The government deals directly with these institutions. They involve them in policymaking, and consult them in making financial decisions. This paper will show how the government is trying to solve too big to fail problem, in order to save the economy. The firms assisted by the government are well off. They get assistance through the taxpayers’ money. This is unacceptable to the citizens. The marketing field will be unfair. The large firms will have an advantage over the small firms.“ The financial system will appear skewed towards big and complex firms, they receive a lot of funds”, (Dudley 56). When the government comes, in handy, to assist these firms, they will grow significantly and become complex because of the financial boost. The too big to fail problems becomes more likely to happen again because the firms would be complex. They will command the market, and other small firms will increase the dependence on them. This is the most controversial situation the economy is facing according to Banking. It presents members of the congress with one of the hardest tasks to solve (Banking 2). The effect of this too big to fail problem hits the banks hard. The government tries to solve this issue to prevent bank failures, as its main objective, because, the economy of the country oscillates around banks. There are plenty of reasons to end too big to fail. Rosenblum argues that, “with this problem, unemployment will remain high; house prices will languish; government will stumble towards bankruptcy and stock markets gyrate” (Rosenblum 1). A citizen will wake up one morning wanting answers to why the economy is falling. The government has to bring assurance to the people. People want a lasting solution to save the economy. The government will ensure the big firms are running well in whatever situation. Financial institutions will bring reforms to avoid too big to fail. Congress in 2010 formulated laws to reform the financial institutions (Banking 15). At that period, big firms were facing collapse. There was impending danger to the economy of America. Eradicating the too big problem is not easy if one is finding a long-term solution. The failure in big firms causes a financial crisis. The crisis comes mainly from banking and regulatory firms (Kaufman 78). This required personal responsibility to prevent such failures, where managers offered leadership. Effects are many; example there will be reduced credit services and provision of day-to-day services in the households and business community. Such effects not only affect individuals, but it extends to the real economy (Lewitt). There are many failures in small financial institutions. “It has effects on the economy, but it cannot be the same when there is a failure in big financial firms” (Harrison & Carter 45 – 56). The firm may not be big, but when that firm forms collaboration with many firms, they command a huge influence. Failure in those collaborations has the same effect with failure in one big firm. The important thing is what the firm is contributing to the financial sector. The firm’s ability to create a problem affecting other firms is also a cause of too big to fail problem. These problems are bringing headache to policy makers. Failure in this firms, and poor financial situation in the country is a complete disaster on the economy. The members of the public will feel the pain because they are the taxpayers. They will lack emergency services and primary human wants. The market knows the problem of too big to fail in large firms is easy to solve. Small firms in the market will feel unfair and create a bad attitude in the markets (Rosenblum 45). The government would assist big firms, taking all the risks involved in that business. There will be reduced cost of funding in the firm, maximizing their profits. This is where too big to fail comes to being an advantage. The firms get complex enough, creating more employment opportunities. Too big to fail problem has two faces. The disadvantage will cause to the economy and the advantage it will have in creating additional complex firms (Bingham 150 – 152). Over some period, firms supported by the government will be more complex, pending more risks to the economy. The solution to this is to this, is to require managers to offer leadership to their firms to avoid failure. The firms should be stable to participate fairly in the market. This will lower the risks of failure in those firms (LaBrosse, Caminal & Singh 197). Players in the business market should remove the notion that if the government assists the big firms, the firms will grow bigger (Rosenblum 132). This will make the market stable and be competitive, raising the economy. Debates and discussions of how much a firm should get in terms of funding if it is facing failure. People are insecure that the firm might get too many funds, or not enough funds to solve the problem. It is hard to tell the intensity of the problem that the firm is facing. Professionals usually estimate the level of problem in the firms before funds reaches the firms. Despite all this, banks usually get the advantage. Banks play a major role in building the economy and are the first to get a solution in times of too big to fail (Penas 63). Other business firms have no control of the economy compared to banks. The control of the economy is not important, but to eradicate the too big to fail problem is the most important. More and more active financial institution has to come in place. If there will be the existence of more robust financial institutions, a failure in one large firm will not affect the economy. A firm that faces a too big to fail problem in a given environment should be allowed to fail, saving the taxpayers money (Malz 58). A long lasting solution is to prevent any failure to happen at all. The will be no situation where a firm is getting funding advantage from the government. The firm should make its resources active and participate actively in the market. The central bank is trying hard to make the market more stable, and if a firm has robust resources, it will not suffer failure. The Federal Reserve is also reducing the risks of creating an unstable financial flow if a large firm fails. The economy will be safe, and no external force shall affect it (LaBrosse, Caminal & Singh 125). Firms need to organize themselves internally. This is where personal responsibility comes to place. The top management should be highly skilled. Costs of operation should be at minimum. By this, a person shall play a role in saving the economy, by preventing the failure of a firm. To avoid this notion, is by reducing the size of banks. Government should place legislation that guide on the limits of banks (Hagendorff, Keassy & Vallascas 56). The financial system of the country will be stable and fair competition in the market. Banks will grow together, and there will be more that are complex. A failure in one of the banks will not hurt the economy. Separating big banks in terms of investment section and commercial section could reduce too big to fail problem. Investment section is more prone to failure than the commercial section. They are available for loans and risk taking business ventures. There will be only failure in one section of the bank, rather than the whole bank. A vibrant economy is highly dependent on financial stability. Solving the too big to fail problem will improve the economy. Improving financial stability will require the firms to be strong. It will not fail easily. All firms should unite and become complex. A failure in one strong firm will not affect the real economy. Interconnected banks will ensure the backbone of the economy is safe. These are not the only solutions. Policy makers are daily researching on new methods of ending too big to fail. There is no assurance in success. It will take years to end the problem if it hurts the economy (Donahue & Nyue 78). Congress has lead by example. It has assisted formulating laws that protect the market from economic downfall. The Federal Reserve is implementing what the congress is formulating. All financial players are trying their best to keep the market robust (LaBrosse, Caminal & Singh 145). Large firms should assist the small firms raise their levels. Small firms will not see biases when the government comes to helping the large firms when they are falling. The economy is sustainable if all partners play well. The people chose the government, and it is their responsibility to implement the right decisions. Small firms are also important in solving the too big to fail problem. They have an upper hand in the economy when they come together. Group of small businesses is complex on their own. Their common decision can hurt the economy (Garnaut 119). If that group fails, it will be regarded as a too big to fail (Dudley 56). Finally, the decisions of big firms affect the economy whether positively or negatively. Poor productivity in big firms will affect the economy. Correct decisions in these firms will maximize profits, expanding the economy. The government has its role in saving the economy, and the decisions they make is for the good of the citizens. Too big to fail cannot happen in an economy with a responsible government in power (Dept 56). Works Cited Banking, United States Congress House Comitee On. Economic implications of the too big to fail policy. Pennsylvania: U.S. G.P.O, 1991. Print. Barnett E. Harrison, Heathe Carter. Too Big to Fail Or Systemically Important Financial Institutions. New York: Nova Science Publishers, Incorporated, 2013. Print. Bingham, Richard D. Industrial Policy American Style. New Orleans: M.E. Sharpe, 1998. Print. Dept., International Monetary Fund. External Relations. Finance & Development, December . Washington: International Monetary Fund, 2009. Print. Dudley, Wlliam C. "Ending too big to fail." Global Economic Policy Forum. New York: New York Press, 2013. Print. Garnaut, Ross, Ross Garnaut. The Great Crash Of 2008. New York: Melbourne Univ. Publishing, 2008. Print. Jens Hagendorff, Kevin Keasey, Francesco Vallascas. Size, Risk, and Governance in European Banking. Atlanta: Oxford University Press, 2013. Print. John D. Donahue, Joseph S. Nye. Governance Amid Bigger, Better Markets. Chicago: Brookings Institution Press, 2011. Print. John Raymond LaBrosse, Rodrigo Olivares-Caminal, Dalvinder Singh. Managing Risk in the Financial System. Chicago: Edward Elgar Publishing, 2011. Print. —. Managing Risk in the Financial System. Mephis: Edward Elgar Publishing, 2012. Print. Kaufman, George G. Too big to fail in banking : What does it mean. Presentation. Chicago: Loyola University Chicago, 2013. Print. Malz, Allan. Financial Risk Management: Models, History, and Institutions. Washington: John Wiley & Sons, 2011. Print. Penas, Maria Fabiana. Bank Mergers and Too-big-to-fail Policy. Maryland: University of Maryland, College Park, 2012. Print. Rosenblum, Harvey. Why we must end too big to fail. PhD Theses. Los Angeles: Oxford, 2013. Print. "TOO BIG TO FAIL IN BANKING: WHAT DOES IT MEAN?" n.d. Web. 4 Mar. 2014 Read More