The Too Big to Fail Debate

"Too big to fail" is a very controversial phrase. It is used to refer to banks those collapse would create devastating financial consequences for a large number of Americans and make the struggling economy even worse. While some economists and legislators argued that too big to fail banks ultimately benefit the economy, others argued that they pose too much risk.  President Obama's administration has tried to mitigate a middle ground between the two theories.

Understanding Too Big to Fail Debate

During the first decade of the 21st century, the expansion in home ownership created a housing boom. It was largely fueled by mortgage loans that offered flexible qualification requirements and as a result, they opened home ownership to thousands of people who could not previously qualify to buy their home. Insurance companies used the new mortgages as collateral to generate funds with risky, exotic investment tools, earning even more money in the process.

Ultimately, the very thing that fueled the housing boom proved to be it's undoing. After a few years, many borrowers struggled to make their payments. This led to rising wave of defaults and foreclosures. The investments that banks assumed would generate profits suddenly became worthless. At first, only smaller banks and lenders were effected. But by 2008, even the largest banks started losing millions, putting them in very real danger of collapse. The collapse of Lehman Brothers only reinforced the gravity of the situation. 

In effort to save the banks, the government bailed them out, lending them billions of dollars. This allowed the banks to regain their financial footing and return to profitability. But the bailout provoked a firestorm of controversy. Since then, politicians and economists have argued whether or not the 'too big to fail banks' were worth the trouble.

Arguments in Support of 'Too Big to Fail'

The proponents of too big to fail banks argue that their biggest advantage is their sheer size.  They have an ability to bring their services to customers all across United States and throughout the world. They can conduct large financial operations using enormous sums of money. This allows them to provide more services, to more people, than their smaller counterparts. They can lend in developing countries, which often don't have strong financial institutions of their own.

Furthermore, their size and their capital allows them to provide those services at cheaper rates than their smaller counterparts.  Proponents of too big to fail banks argue that this makes them uniquely equipped to help to economy and encourage development in United States and throughout the world.

Arguments Against 'Too Big to Fail'

The opponents of too big to fail banks argue that the fallout from the collapse of too big to fail banks far outweigh their benefits. They also argue that while banks can certainly grow large, they can do everything without growing more than $100 billion in size. Most 'too big to fail' banks grew several times that number. For example, Citigroup had over $2.5 trillion in assets.

Some opponents argue that while large banks can muster sizable resources, smaller banks are much more attuned to the unique needs of their particular location and are better equipped to use their funds efficiently.

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