Too Big to Fail

In: Business and Management

Submitted By gdsgmg
Words 749
Pages 3
First of all, it’s necessary to understand the Too Big To Fail (TBTF) doctrine to understand the quote. Too big too fail concept appear in 1984 and imply that a company cannot fail because of the systemic failure its bankruptcy could lead to. More, the banking and the insurance sector have a social impact on the economy by his status of keeping customer’s money. Also, by support in the economy, a lack of confidence in banks could lead people to withdraw their money bringing the system into collapse. Those reflections have created the TBTF doctrine.
Obviously, this idea leads to a number of questions and especially the existence of this doctrine in a capitalism economy. Without the notion of bankruptcy linked to responsibility, the being of Too Big To Fail is dangerous. It’s the idea of Simon Johnson saying that this this kind of company shouldn’t exist. Because a company can’t fail, the behavior of the whole company could lead people not to be responsible because there is no consequence. If we agree that the incentive of most companies is to make money no matter what kind of industry it belongs to, the lack of consequences of their bad decisions could lead its management to take more and more risk without any compensation in order to make as much money as possible. The too big to fail principle avoid any bankruptcy by having in most cases the government as a final warranty to save the company in any situation. To avoid those issues, Simon Johnson and more voices are raising saying that a solution could be to ban a company to be too big, especially banks. The direct implication would cut to size big banks already too big to fail. But this action could lead to a real economic crisis. To make it simple, in order to reduce their balance sheet, banks would reduce their lends to the economy or sell their assets, it’s got to be one way or the other. In the first hand…...