Question:
This is a juxtaposition discussion question. Choose a side. If you choose the green side, find resources support your response. You must also argue against the RED side. If you choose the red side, find sources to help support your position…but you also argue against the GREEN side. This is a complicated topic this week, so be sure to be thorough in your exploration of all the many facets.
A bailout creates another moral question - what if they don't pay back the bailout? Depending on who one listens to, all debt has not been repaid. If they were too-big-to-fail before, wouldn't they still be too-big-to-fail? What does the government do to compel the payback? Should the government be allowed to intervene into day-to-day matters to watchdog ongoing operations?
Answer:
Introduction:
It can be observed that the International Monetary Fund while evaluating the costs of the bailouts has taken into consideration the extra amount of debt on the part of the government which is relatively similar to the size of their economy (Gorton & Tallman, 2016). However, it can be observed that the moral hazards are associated with it as the institutions failed in their part to systemize risk. Therefore, it is important on the part of the government authorities to take reasonable measures. With the advent of asymmetric incentives, it has encouraged them to involve in risky bets. Therefore, in such process, it has encouraged risky bets that the regulatory bodies were trying to avoid for a long time. In this regard, the government authorities are not at the authority to threaten the banks.
It is worthwhile to refer here that, the problem of crisis has passed from two phrases i.e. from an acute phrase to a chronic phrase. In this process, the focus of the nations has considerably shifted towards the issue of Too- Big- to- Fail (TBTF). Underlying the issues of Too- Big- to- Fail (TBTF), the prescription of certain policies proved to be very controversial (Siegert & Willison, 2015). These can be emphasized as taking over large insolvent banks by selling off the performing assets of smaller banks and employment of anti-trust legislation. The responses regarding the Too- Big- to- Fail (TBTF) are deep-rooted in the observations regarding financial crisis.
References:
Gorton, G., & Tallman, E. W. (2016). Too Big to Fail Before the Fed. American Economic Review, 106(5), 528-32.
Siegert, C., & Willison, M. (2015). Financial Stability Paper 32: Estimating the extent of the ‘too big to fail’problem–a review of existing approaches (No. 32). Bank of England.
