You might want to take a seat for this one...it can be dizzying trying to look at corporations that are too big to fail.
The economic idea that corporations, namely financial institutions, are too big to fail...is the idea that we’re all so dependent on them that the government must step in to avoid widespread economic disaster. (Precedent: the British government stepped in to back BP when its catastrophic oil well explosion and pollution threatened its existence.)
Lots of people have lots of opinions on this, especially after risk-happy big banks and loose regulations created the perfect storm of the 2007 global financial crisis. Some believe that no financial institutions should be too big to fail, like once-Fed-chair Alan Greenspan. If they’re too big to fail, they're too big; all private institutions should have the potential to fail. That’s how market capitalism is supposed to work, right? If a restaurant serves bad food or gets its customers sick, it’ll go out of business; only the restaurants decent enough survive the competition. Same with banks. The ones that mislead customers or take on too much risk should go under and be replaced by other ones, “naturally.” Otherwise, we’re just enabling risky financial behavior, which will create more of the same problem.
This is called moral hazard: being purposefully risky because they know they’d just get bailed out anyway.
Others think that being too big to fail is okay, as long as the financial institutions are regulated. Keeping consumer and commercial banking separate protects consumers, keeping them safe in the sandbox...while commercial banking can go as wild on the monkey bars as they please.
New legislation came after the 2007 financial crisis, but according to the IMF and many others, the problem of banks being “too big to fail” is still a problem. They haven’t been broken up as critics have suggested, and they haven’t been regulated enough, as proponents have suggested.
