The Importance of Financial Firms in the US Economy

1083 Words5 Pages
In the United States, many financial firms play a large part in the economy. These firms do business with many companies, from trading supplies and services to lending money. These companies depend on the resources that these financial firms have in order to grow within the economy. Some financial firms are so important to the economy that they have grown so large that they have engrained such a culture that if they fail it will be costly to the growth of the United States economy. This is known as the “Too Big to Fail” theory. This theory states that if such a firm does in fact fail within the economy, the government becomes a safety net for these firms. The government then provides financial assistance in order to prevent the firm from failing, which would lead the firm not to cause a collapse in the economy. This theory is a problem in the United States because it creates an advantage for the large financial firms vs. smaller financial firms and it gives firms an incentive to be more risky. When the government intervenes with such a bailout, it creates an unequal dynamic between small and large financial firms. Many small firms don’t have the resources to expand as big as the large firms. So if a bailout is given to a large firm, they are receiving extra funding that a smaller firm may never receive because they lack the resources to do so. In essence, the government is giving an advantage to these large firms because their survival to the economy is very important. Some of these large firms may take advantage and try to get to the point of “Too Big to Fail” in order to receive a bailout. In the article The Role of "Too Big to Fail, the author states that “this creates an incentive whereby banks may desire to become larger, no... ... middle of paper ... ...er firms and it gives these large firms a reason to be reckless and take on greater risks than they already have. I believe the best way to control the large firms from adhering to this theory is to regulate these firms from start to finish. By watching over them and having these firms follow certain guidelines, will limit their ability to fall off track and become bigger too soon. I also believe that by not giving these firms much of safety net is a major factor. If these firms realize that no one would be there helping them when they fail, they might not take great risks in the market, therefore not growing to fast and failing. Because they believe that the government is always behind them they have no reason to not to take risks. The idea of watching them fail might be a good thing after all, because in the long run it could save both the firm and the government.
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