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During the first of the half of the current economic crisis, some companies began to collapse due to the subprime mortgage crisis or from the cascading economic damage that it entailed. A danger was seen in allowing some large important companies to fail. Many within the US Federal Reserve, as well as, the Bush and Obama administrations believed that these large companies were so essential to the economy that if they were not saved from economic ruin the economic damage would be even more extensive and cascading.

Therefore these Administrations prevented the collapse of some large companies by providing capital in one form or another while they attempted to return to profitability.

Many have questioned the wisdom of whether or not these companies should have been allowed to fail instead. These critics contend that it was the political clout of these companies, rather than their place in the economy, that caused politicians to save these companies. While others contend there is a moral hazard in not allowing companies that do poorly to fail. In their view, this would mean that in the future companies have less incentive to avoid risk, because they can depend on a government rescue.

Is there any economic data to support whether or not saving these large 'too big to fail' prevented far more extensive economic damage?

Or was the bail-out of these companies a waste of both money and effort?

Does economic data support support either position?

Mark Rogers
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    While the question is interesting, I am afraid it is probably out of scope of both this site and skeptic method to answer it. To perform economy experiments or to falsify economy theory is extremely hard to do, and any data gathered are likely to be disputed, as even economy indicators like GDP are not defined rigorously enough for a solid comparison. – Suma Mar 14 '11 at 07:44
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    I think that the question is answerable. "does the claim that some companies are too big to fail stand up to skeptical scrutiny or is it just pseudo-economics?" is a perfectly acceptable question. – Sklivvz Mar 14 '11 at 08:26
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    I am not sure this question is answerable as it's currently phrased, since it's asking for a contrapositive (ie/ If we hadn't saved these companies, would we have seen more extensive economic damage?). It may be better to rephrase the question along the lines of "What evidence is there to support the belief that the failure of large financial institutions will cause devastating economic damage?" I would also recommend removing the paragraph about the political clout of companies, as it skews this question towards being argumentative. – anthony137 Mar 14 '11 at 18:23
  • @anthony137 - I disagree with your suggestion to remove the "political clout of the companies" part. I think that it in fact, makes the question more neutral instead of more pro-bailout. As to your other point: The concept of "Too big to fail" was not invented solely for the 2008 crisis, but has existed for sometime, so historical economic data could be used to objectively evaluate the effects of letting a "Too big to fail" company crash. After "Too big to fail" was applied to these companies, many were **skeptical** of this label. I'm asking whether their **skepticism** was warranted. – Mark Rogers Mar 14 '11 at 18:32
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    @MarkRogers It seemed to me that the "clout" paragraph spoke more to motive than belief. I don't like attributing motives in discussions like this. A better balancing argument, in my opinion, would be the direct rebuttal; either that the economic damage would be minimal, or that the moral hazard of saving the banks outweighed the potential economic damage. – anthony137 Mar 14 '11 at 18:58
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    @MarkRogers I agree that historical data might be useful and that the question, generically, is a good one. However, I suggest that we de-couple the specific 2008 crisis from the more general question of whether a company is _ever_ too big to fail, and what evidence tends to support or disprove that claim. – anthony137 Mar 14 '11 at 19:01
  • @anthony137 - Sorry but I disagree again. I'm refuting a specific claim about a specific crisis, not the general case. I think making the question less specific would make it less objectively answerable, and also it would essentially be a question more about theory than a real economic situation. – Mark Rogers Mar 14 '11 at 21:36
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    This is a claim about which there are conflicting views among highly skilled professional economics. There is no chance that a bunch of guys on a fact-checking website will get a definite answer to the question. – DJClayworth Jul 31 '17 at 18:01
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    @Sklivvz - unfortunately, economics as a discipline has been debased by political advocacy on both sides to the degree that it may be difficult to establish *anything* as either psuedo-economics or not psuedo-economics, barring the most egregious cases. The truth whispers. The politicians and lobbyists shout. – Ben Barden Jul 31 '17 at 20:25
  • I like to think the $7.77 trillion bank bail out money and the $6.5 trillion the US army lost is sitting on a card table and two dudes are about to sit down for a texas holdem showdown. – daniel Jul 31 '17 at 22:49
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    I'm not sure this question could be answered without access to a time machine and the ability to go back and follow an alternative reality where the "too big to fail" businesses were not bailed out. – GordonM Aug 01 '17 at 08:50
  • Wikipedia might be a good place to start: https://en.wikipedia.org/wiki/Too_big_to_fail – ventsyv Aug 01 '17 at 14:58
  • I remember reading an article at the time in which a bank executive was quoted (anonymously) as saying the bank didn't need the bailout money, but they took it anyway. Hey, free money. So if the bank itself didn't need the bailout, what was the point? "General confidence in the economy" is a good excuse, but you can't quantify potential shifts. "Government seen as taking positive step" is also a good excuse. To answer this question, I'm afraid you have to dig into the causes, and several books have tackled that one. – Ralph Crown Aug 01 '17 at 17:39
  • @RalphCrown Even if true, that would be only one bank that didn't need the money, saying nothing about the rest. – JAB Aug 04 '17 at 15:27

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