The Importance Of Financial Firms In The Us Economy

1359 words - 6 pages

In the United States, many financial firms play a large part in the economy. These firms do business with many companies, from trading supplies and services to lending money. These companies depend on the resources that these financial firms have in order to grow within the economy. Some financial firms are so important to the economy that they have grown so large that they have engrained such a culture that if they fail it will be costly to the growth of the United States economy. This is known as the “Too Big to Fail” theory. This theory states that if such a firm does in fact fail within the economy, the government becomes a safety net for these firms. The government then provides financial assistance in order to prevent the firm from failing, which would lead the firm not to cause a collapse in the economy. This theory is a problem in the United States because it creates an advantage for the large financial firms vs. smaller financial firms and it gives firms an incentive to be more risky.
When the government intervenes with such a bailout, it creates an unequal dynamic between small and large financial firms. Many small firms don’t have the resources to expand as big as the large firms. So if a bailout is given to a large firm, they are receiving extra funding that a smaller firm may never receive because they lack the resources to do so. In essence, the government is giving an advantage to these large firms because their survival to the economy is very important. Some of these large firms may take advantage and try to get to the point of “Too Big to Fail” in order to receive a bailout. In the article The Role of "Too Big to Fail, the author states that “this creates an incentive whereby banks may desire to become larger, not for scale-economies, but to capture the benefits for capital funding subsidies through a legal construct” (Normann). This makes it unfair for these smaller financial firms who can try to expand their business but cannot achieve what the larger firms can. Since these firms do not create a huge dent in the economy they are missing out what they can get from the government. The government is discriminating with these smaller firms because they aren’t as important within the economy. When they cannot grow to become an important factor it tends to lead to the small firms to disappear within the economy because either the larger firms have bought them out or they cannot survive by themselves. This is a problem because it gives most or even all the power to the larger firms.
When the large firms inadvertently become bigger and bigger they are doing so because they realize that its “free” money that they are receiving. And as greedy as these financial firms are there aren’t going to deny it. The managers of these firms believe that they have nothing to lose cause ultimately they have so much power in the economy that if something were to fail they would be saved by the government. But its not like the government has they...

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