Too Big To Fail (TARP)

I decided to do my final paper on the issue of “Too Big to Fail.” The saying itself is a little misleading because it is not the actual size of an institution that threatens financial stability but rather the interconnectedness of corporate success and economic success. The theory suggests that there is no uniform way to allow some institutions (like major financial corporations) to fail without causing an absolute market meltdown.  In doing my research from the government perspective, I spent a lot of time analyzing what course of action the government took in this crisis, and how ethical I thought it to be. One program I spent a lot of time looking at was TARP (Troubled Asset Relief Program).

TARP was part of a bill passed October 3, 2008 which gave the U.S Treasury $700 billion to buy up bad assets in the form of mortgage backed securities from institutions deems ‘too big to fail.’ The purpose of this was to create liquidity and free up credit. According to the government, TARP played a critical role in stabilizing the system by restarting capital markets and decreasing borrowing costs for business and families. They made the argument that while the big financial institutions were the ones to receive capital injections, the small businesses, community banks, and struggling home owners were the ones assisted by the new capital. The U.S Department of the Treasury makes a series of wild and impressive claims on the site that TARP saved GDP from falling three times as much and saved approximately 8.5 Million American jobs.

I agree that TARP helped the system in a state of crisis, but it is not a strategy that will work in the long run for financial stability. If an institution is ‘too big to fail’ they have obvious advantages over those who will not be saved every time something goes wrong.

A number of ethical questions come in to play here. Is government intervention in the form of purchasing troubled assets and capital injections wrong? On the flip side, is it also wrong for the government to sit back and watch a business failure bring down the financial system and ruin millions if not billions of lives? For me, both seem unethical. Some have suggested the solution: break up the institutions. In response to this it seems wrong for the government to have the power to destroy a business simply because it is too big.  Is there an ethical solution to this problem?

This entry was posted in Business, Cases (Real World), Ethics, Government, Uncategorized and tagged , , , , , . Bookmark the permalink.

3 Responses to Too Big To Fail (TARP)

  1. bucknell92 says:

    Isn’t it interesting that people want to be connected to as many people as possible through things like facebook, twitter, or linkedIn. I find it interesting that business that try to follow this type of strategy are targets because they have simply become “too big to fail”, but isn’t that what people are doing through social media. Yeah, they aren’t make money but it seems that people want to be connected with as many people as possible because it some way that gives them a sense of secruity.

  2. ChrisB says:

    I agree that breaking up companies just because they have become “too big to fail” is not the way to go. The government shouldn’t have the power to split up a company unless it has become a monopoly. On the other hand, I also don’t think it is fair that once a company has gotten so big that it can take ridiculous risks because it knows that the government will bail it out. There should harsher penalties for relying on the government. Perhaps a company that gets bailed out should pay much higher interest rates or pay into the social security fund so that at least the people will be getting something out of it as well.

  3. Jordi says:

    13 Bankers book! See if you can assess US government claim as to jobs saved?

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