Bailouts Effect On Economy Essay

934 words - 4 pages

Almost 1.2 trillion dollars were spent on bailing out the various banks in the 2008 financial crisis. First, what bailouts are is explained. Then, the history of bailouts in the US is told. Finally, the effects of the recent bailouts are analyzed. Because billions of dollars are spent on bailouts, they need to be understood by the public by knowing their history and their effects on the economy to ensure informed decisions in the future on whether or not banks should be allowed to fail.
A bailout is the process of offering money to a failing business, often in the form of a loan, in order to prevent the consequences of that business going bankrupt. The most well known type of bailout is when the government bails out a company but that is not the only kind of bailout. It can be an individual bailing out a company, a company bailing out another company or even a government bailing out another government as has been happening in Greece for a few years. The reason that a company is bailed out is because of the "Too big to fail" theory which states that some banks or other companies are so large and interconnected with the rest of the economy that if it failed there would be disastrous effects in the rest of the economy, enough to cause another recession or even another great depression. For example in 2008, the global financial services firm Lehman Brothers filed for bankruptcy, which was the largest bankruptcy in U.S history with over six hundred billion dollars in assets. The bankruptcy of Lehman Brothers is thought to be one of the major causes of the Great Recession. Because of this, the government is usually willing to assist large companies to prevent the consequences of the companies failing.
One of the first bailouts in the U.S. was the financial panic of 1907 when Otto and Augustus Heinze tried to corner the market in Aug, United Copper Company. When he failed to do this, everybody started to withdraw their money from any bank or trust associated with them, one of which was the Knickerbocker Trust Company so it collapsed since banks have the majority of their wealth in loans. This caused a ripple effect so more people tried to withdraw from banks. The only reason it was resolved effectively was that J.P Morgan convinced the federal government and a number of bankers to provide enough money for the stock market to continue operating and bailout various banks. It is obvious here that without the help from J.P. Morgan and the bailouts from the government and banks, that the economy would have fared much worse perhaps been a recession of the scale of the Great Recession or even the Great Depression. On the other hand, 101 years later in the economic crisis of 2008, things were not fixed...

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