Too Big to Fail

Too big to fail

The idea that a business or a financial institution becomes so large and powerful that it is ingrained in the economy and that if it fails it will have a ripple effect throughout the economy. The phrase “too big to fail” is directly associated with the government providing financial assistance to prevent the failure of such businesses. The failures of these companies are directly interconnected with the economy. Large companies usually do business with other large companies, and if a large company fails, then the companies that rely on the business will also be brought down, this directly affects business institutions and the employment market. The number of jobs related to that business will have a downturn, and because these companies are so large that the employee number is also ridiculously high. The phrase “too big to fail” arose in the financial crisis of 2008. The government had to bail insurers, banks, and auto companies. These companies became big by swallowing smaller companies that in the end, they took competitive advantage and knew that the government would have to bail them out or else risk economic collapse of global proportions. Too big to fail does not literally mean that a financial institution cannot fail, but that it is not allowed to fail.

Being too big to fail does not mean that there are no risks, in fact it means the opposite. Financial institutions are really fragile inherently, as intermediaries they are exposed to all different kind of threats. To simplify it, financial institutions were being governed poorly and taking on liabilities, gambling with high risk activities like mortgage backed securities. The root of the problem consisted of poorly underwriting of credit, as mortgages were being loaned and repaid; the banks were taking advantage and lowering the qualifications for the loans. As the rich were buying houses, the poor then had the chance to do so; by this, the mortgages were not being paid....