Economics

The concept of the too big to fail refers to a scenario where a government is forced to intervene when certain companies or organizations in the economy are signing for bankruptcy. It is a situation where the major players in a countrys economy expect the government to protect them from financial disaster when their businesses get into financial crisis. In a simple language, it is the bailing out of businesses that are in financial trouble. The major organizations or companies that have been bailed out in the US include financial and housing institutions, insurance companies as well as airline industries. Since the global economic crisis which is believed to have come from the troubled US financial system and the housing sector, the US government was forced to intervene in many businesses. The economic intervention by the government of the United States was believed to be the only way to deal with the current situation. This was the case due to the fact that all the other policies aimed at reviving the economy had failed to achieve this. This is because the magnitude of the problem was severe. The economic recession was characterized by reduced demand for goods and services which translated to low production and massive loss of jobs. To handle the situation, the government had to provide assistance to the companies that had a direct impact on the entire economy such as the housing institutions (Fannie Mae and Freddie Mac), and financial institutions like Bears Stearns and AIG.  If these companies were not assisted, it would have led to loss of more jobs. In this case, the economy would sink to even deeper recession that would have been impossible or very difficult to get out of.
  
Proponents of the economic bailouts for the too big to fail problem argue that the government is the only institution patient enough to purchase the troubled companies and wait to sell them when the economic conditions improve. Concerns are however raised about the valuation process where there could be overvaluation or undervaluation and in the case of an undervaluation, no positive effects would be made and the taxpayers money would not be effectively used. An overvaluation on the other hand would mean increased borrowing on the part of the government which comes at a cost or interest. An effective bailout would however ensure increased economic growth and increased consumer confidence levels. Bailing out financial institutions would for instance ensure increased accessibility to credit thus increased investment both at the individual as well as at the business level.

The need to address this issue is brought about by the fact that the financial institutions need to be made aware that they are at danger of loss. If these institutions will continue to rely on the government for protection, it will be forced to continue doing so at the expense of the taxpayers money. By expecting incentives from the government, the businesses will continue to be involved in too much risk. Increase in risk-taking leads to misuse of resources that may cause financial crisis. The burden of such financial crisis is borne by the tax payer. In other words, if the US fails to address this problem, it will continue to offer support to an ineffective economic system, a slow developing economy and low standards of living.
 
Holding of more capital while it is possible is a possible remedy. This will ensure that in case of crisis, the firms can survive. The too big to fail institutions should be put in a position to hold good amount of capital and supervised carefully to ensure transparent flow of that capital. Policy makers in this case will be required to enforce strict regulations to ensure smooth running and that they do not get involved in undue risks. It will be necessity for the institutions to possess enough capital that will be in a position to provide protection to the economic system even in a situation where the institution fails. In this kind of arrangement, it is the organization that will protect itself from collapsing.    

Another remedy put forward is for the financial institutions that take deposit to be well regulated and their deposits assured by the state. They should also be prevented from trading forcefully. Paul Volker argues that banks should be left with the responsibility of serving their clients while the big-money operations are left to the institutions outside the state safety net.

The opponents of this remedy claim that the distinction between the two operations might prove hard to define. The possible improvement to this remedy is for banks to have more capital for their operations than they possess at the moment. This will help offer them insurance in time of economic turmoil.    

Bail in instead of bailout is another remedy put forward by Paul Galello and Wilson Ervin. The two suggest that policy makers should be made to make a choice between incentives and the possible collapse of the system. Instead, there should be fast adjustment of the capital structure of the business that is at the risk if collapse. They argue that in this case, there will be a bail in that will lower risks and alleviate the necessity for the government to infuse funds into that business. In this case, the bail in will necessitate the policy makers to possess enough authority to eradicate ordinary equity-holders and restructure the capital base of the firm by changing selected shares and liabilities into equity. What this two are recommending is a quick kind of pre-packaged bankruptcy.  The problem with this kind of a solution is that shareholders may drag the process so much before reaching an agreement. With the kind of business and the state of the problem, the firm might not have such time. In case of a financial institution that is at the brink of bankruptcy, people lose confidence in it in a very short time. This means that the firm will not have at its disposal time to wait for the decision by the shareholders and the restructuring to take time. The difference between this remedy and that of private sector involvement is that in this case, it is the organization itself and its stakeholders who will be expected to save the institution.  The only way to have such a solution working is by giving the policy makers the power to order the conditions of restructuring within a very short period of time. This will demand that all the players be made aware of the move beforehand.

One of the remedies proposed for solving the problem is the reorganization of the company or firm that has been deemed too big to fail. This is attributed to the fact that the poor financial conditions of the firms or businesses could have been triggered by poor management. Some critics of the government bailouts argue that such instances ought to be resolved by the market forces which would only be realized with time. This approach further suggests that the failing companies can be offered loans to pay in a specified time period and at a given interest rate. Again, private investors can be given the chance to invest in such companies. The notion that with the economic crisis compromised the purchasing power of all interested private investors was also found untrue.

The Goldman Sach and Lehman Brothers instances illustrated that the private sector could revive the prevailing conditions. This approach is more appropriate as it would reduce the public debts attached to increased borrowing for the government. Again, the government funds would be used for other purposes such as healthcare and education. Establishment of deposit insurance firms that can come at the rescue of the financial institution in case of trouble can be a good idea. The firms can be controlled by the public sector, the private sector or through an agreement by the two. Even where the insurance firms are controlled by the public sector, they can be subleased to a private firm for control. Whenever a financial institution is in trouble, it will go to the insurance firms and not the government for help. Government provided insurance can also address this problem. Another remedy that is closely related to this is reducing the number of institutions that are too big to fail.

Another solution to the problem is to find means of reducing the number of firms that are too big to fail. However if this is to be done, it should be in such a way that it does not create major risks to the economic system. In this case, the policy makers must come up with guidelines that would require to be implemented to restrict the size and range of activities. The guidelines would restrict the institutions for turnout to be completely significant at the same time leaving the running of the company to the management only. The management will have the control of determining the proper level of risk to take without overburdening the state with rectifying their mistakes. The advocates of this remedy support the reduction of reliance of so many households and firms on very few organizations that involve in many risks. There are other arguments that dispute this remedy. One such case is that of Lehman Brothers which. This reveals the fact that there are some financial institutions that are not that big, but their collapsing can still cause effect on the economy. It is not possible to establish firms that are not too big to fail. This remedy is not practical because it will be very hard to control the growth of a financial institution. It is also an authoritarian kind of solution that might not seem appealing in a democratic society.

All the remedies put forward are possible solutions to the too big to fail problem. Holding up of enough capital makes the institution to ensure its operations and the economic system in case it fails. This solution is closely related to recapitalization because the saving force of the institution comes from within the organization. Provision of insurance by the private sector is a better remedy than that of the government. Insurance by the government has no big difference from its involvement in providing incentives. The private sector in this case takes the burden of covering the institution in case of trouble. In this case, that burden is taken away from the government. Offering loans to troubled financial institutions is risky because the institution might be deep in financial trouble such that it is impossible to save it. In which case, it will still fail. The best remedy for to this problem is making the financial institutions to hold more capital, not only to enable them to survive a crisis but also to avoid affecting the economy in case of failure. This remedy is the most applicable because with the knowledge that the organization is on its own, its management can learn to be accountable. The policy makers will be in a position to implement regulations that will ensure that the management is proper and that unnecessary risks are not being taken.  

Conclusion
Failure of financial institutions in the economy seems unavoidable. This therefore means that if nothing is done and the firms continue to rely on the government, the taxpayer will continue to carry the burden of such institutions. It is not fair that financial institutions are allowed to engage in serious and unnecessary risks just because the government is ready and willing to bail it out. This is the reason by the most remedy to too big to fail problem should be found very fast. It is important to undertake research even in other countries to come up with the best remedy to the too big to fail problem.