Too Big to Fail

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Submitted By kdickey
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On October 3, 2008, President George Bush enacted the Emergency Economic
Stabilization Act of 2008 (EESA), in an effort to mitigate the economic repercussions of the subprime mortgage crisis (Nolen). The crisis was a result of many factors that can be categorized under the term subprime lending, which refers to higher risk loans to individuals with limited creditworthiness. The Emergency Economic Stabilization Act authorized the
United States Secretary of the Treasury to spend up to $700 billion to purchase mortgage-backed securities and other troubled assets in order to prevent the collapse of the U.S. financial system
(Nolen). Ultimately, the policy resulted in federal bailouts intended to strengthen consumer confidence, increase liquidity, and stabilize the credit market by protecting “too big to fail” banks from failure. Supporters of the bailouts argued that, though it may not be ideal, protecting the largest banks against failure was necessary to prevent an even larger financial crisis from devastating the entire U.S. economy (Slavov).
The 2008 financial crisis highlights the dilemma created by “too big to fail” banks, a term given to financial institutions that are so intertwined in the economic system that their failure would result in economy wide repercussions and ultimately give rise to a recession. This was the argument in favor of bailouts in the subprime mortgage crisis. These major banks are so crucial to the economy that if they collapse, other institutions that are financially connected to them may also fail, creating a domino effect across the economy (Leeson). As a result, many policy makers advocated in favor of creating a security net for these institutions so as to prevent against a total financial meltdown and a collapse of the American economy.
An unintended consequence of the financial bailouts…...

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