Too Big, or not Too Big: That is the question!
Many people involved with the market are adamantly opposed to any actions justified by the term “too big to let fail.” In capitalism, a company should be able to experience without interference both the profits and the losses that come with business. In theory, if a company has placed itself in a position where there is a possibility of failure, so be it; the company will have to deal with the consequences of their mistakes. The notion that the government — posing as a white knight — will ride in and rescue the company from danger is a thought that repulses many market followers. However, while existing in the theoretical world is nice, reality is far more complex. I applaud the federal government stepping in to help embattled companies Freddie Mac and Fannie Mae, as the extended consequences of their potential failures outweigh the theoretically sweet idea of a non-interfering government. Furthermore, I encourage the Federal Government to continue to utilize the “too big to let fail” mentality in order to stave off a severe recession.
If a house a few blocks down is on fire, should you do nothing? The chance the fire will destroy your house is slim, yet you might still feel the effects of that house burning down. For example, the smoke might linger in your neighborhood for several days, or in the longer-term, nearby property values may fall. In other words, though an entity seemingly unconnected to you is in danger, you still might feel the ramifications should the “fire” not be extinguished in time. No one is an island, and were Freddie Mac and Fannie Mae allowed to fail, people throughout America (and hence, the globe) would have been subjected to a worsened recession. Had the federal government done nothing to help the two companies, it is likely that they eventually would have had to use more taxpayer funds in the long run to help heal the economy. The domestic housing market is already in enough trouble, and though I do believe that discretion should be used when deciding how big is “too big to let fail,” I think the Federal Government was right in its actions.
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