The Instigator
Mfuss
Pro (for)
Winning
3 Points
The Contender
lannan13
Con (against)
Losing
0 Points

Too big to fail is too short minded for longer economic growth.

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Post Voting Period
The voting period for this debate has ended.
after 1 vote the winner is...
Mfuss
Voting Style: Open Point System: 7 Point
Started: 8/20/2015 Category: Economics
Updated: 1 year ago Status: Post Voting Period
Viewed: 628 times Debate No: 78861
Debate Rounds (5)
Comments (4)
Votes (1)

 

Mfuss

Pro

Definition 'Too Big To Fail': The idea that a business has become so large and ingrained in the economy that a government will provide assistance to prevent its failure. "Too big to fail" describes the belief that if an enormous company fails, it will have a disastrous ripple effect throughout the economy. [1]

The argument of "Too Big to Fail", is a theorized and untested argument. Too big to fail and moral hazard walk hand in hand and when the too big to fail doctrine is set to motion moral hazard is highly probable to accompany it. This is a problem because corporations as well as governments that have been embraced by the "Too big to fail" doctrine are not helping the overall economic climate long term by staying afloat. Rather these corporations & governments are a weight on the federal budget of the governing body. The "Too Big to Fail" doctrine is a short term bandage to the economy that will peel off into a festering wounded economic horizon.

[1] http://www.investopedia.com...
lannan13

Con

I accept, you may begin.
Debate Round No. 1
Mfuss

Pro

First I would like to make certain general definitions clear.

Economy: The large set of inter-related economic production and consumption activities which aid in determining how scarce resources are allocated. [1]

Financial Crisis: A situation in which the value of financial institutions or assets drops rapidly. A financial crisis is often associated with a panic or a run on the banks, in which investors sell off assets or withdraw money from savings accounts with the expectation that the value of those assets will drop if they remain at a financial institution. [2]

Investor: An investor is someone who provides (or invests) money or resources for an enterprise, such as a corporation, with the expectation of financial or other gain. [3]

Moral Hazard:The risk that a party to a transaction has not entered into the contract in good faith, has provided misleading information about its assets, liabilities or credit capacity, or has an incentive to take unusual risks in a desperate attempt to earn a profit before the contract settles. [4]

The Too Big to Fail concept, hereafter abbreviated "TBtF", has been a topic of much debate in the past nine years as the United States and Europe each entered into a financial crisis. I am on the opposition of the TBtF concept as it leads to long term downward pressure being put onto the overall economy in terms of excess debt, in non monetary liabilities, on the government. [5] TBtF if done in terms of monetary levity should have been implemented at minimum four times in the past where it was not, Enron (2001), WorldCom (2002) Washington Mutual (2008), & largest at a total value of $691 billion, Lehman Brothers (2008). [6] Solely looking at Lehman Brothers the bankruptcy had more in total value of debt than all the additional bailouts of nine hundred and fifty-one recipients, valued at $615 billion. If the economic ripples were to happen nothing reached wider or deeper into the financial system than Lehman Brothers did. The TBtF argument is flawed in that the biggest was not too big and fell, the economic ripples have been felt and weathered. My stance is based on the priciples above and I am for the stance that TBtF is a trap of moral hazard.
To quote Sheila C Blair, chairman of the Federal Deposit Insurance Corp, “It fed the crisis, and it has gotten worse because of the crisis.”

[1] http://www.investopedia.com...

[2] http://www.investopedia.com...

[3] http://www.vocabulary.com...

[4] http://www.investopedia.com...

[5] http://www.bis.org...

[6] http://content.time.com...
lannan13

Con

I myself am also against "Too Big to Fail," but there are some things that are serious issues if we don't do anything.

The free market has caused many great things to occur and one of those things is innovation. This occurs when companies constantly compete and this betters society no matter how big they get and thus we need to leave the market. We need to observe the economy and what wouldn't have occured if we didn't bail out the WORLD economy. No I'm not talking about TARP, but I'm talking about the US Federal Reserve $29 Trillion bailout. [1] This didn't just go to US companies, but went overseas to prevent a global collapse. You may ask why did they do that and that was to stabalize the market's so investors in the US could resume trading. If the Global Economy was collapsing there is a HUGE chance that it would have dragged the US economy back down. [2] This was backed when the Treasury's "Stress Test" came back with positive results. [3] If this wouldn't have happend we would have seen the Global Collapse.



As we can see from the chart above we can see tha the US unemployment rate hit the highest that it has been in over the past 20 years and ended up being just a bit shy of that of the Great Deperession. If we completely adopted a hands off economy we would continue to see the bank busts that occured like the ones in the 1800s and the Panic of 1908. More likely than not the US economy would have been in a worse state then it is today especially if we did not help out the economy.

Debate Round No. 2
Mfuss

Pro

As a side conjecture I will first address the free market and the fallacy of the idea that TBtF would ever exist in a free market. Free market or laissez faire holds truest to the idealism's of a hands off philosophy, in that TBtF would be the last thing that the free market would seek out. The innovation of TBtF was an economic policy entirely separate from free market capitalism. Now let me address the argument at hand.

R1: Treasury Stress Test and erroneous cited research

I would like to note that my opponent uses the US Treasury's stress tests as a source stating that the tests came back with positive results. While this may be true the source that my opponent used is simply a definition of stress tests therein bears no credentials to back his statements of stress tests yielding positive results. Also to note the Bloomberg article states that a mere $1.2 trillion was given to banks to subsidize failure, whereas the Levy Institute article references a $29 trillion bailout. The Levy Institute article also references the Bloomberg article but states that the sum Bloomberg had founded under the "Freedom of Information Act" was $7.77 trillion. This again contradicts the article going on to state that the Bloomberg information was lacking in a total of $21.33 trillion. I am to assume that one, if not both, of these sources is not credible and I will leave that to the Con to decide which source he would like to keep.

C1: The Panic of 1907 in relation to TBtF.

The panic of 1907 is very similar to that of the 2008 TBtF doctrine, the difference is that the Panic of 1908 was dealt with privately, whereas the 2008 TBtF was dealt with publicly. " the Knickerbockers Trust, the second-largest trust company in the United States, was forced to suspend, triggering fear throughout the country and massive cash withdrawals from New York City banks." [1] This can be related to the failing of Lehman Brothers at the time the Second largest investment firm in the United States directly behind Goldman Sachs. J.P. Morgan purchased government a total of half the issued government bonds to subsidize the further failing of banks. "The dollar volume of bankruptcies had spiked by 47 percent, and unemployment had risen from 2.8 to 8 percent. Ultimately, the Panic of 1907—one of the most severe financial crises in the United States’ history—led to increased financial regulation by the government and the creation of the Federal Reserve System in 1913." [2] The Panic of 1907 was very similar to the TBtF issue the differences, the 1907 Panic had lower unemployment, a quicker turn around period, a more united private sector front, a roaring economy in the 1920's, most importantly it was privately not publicly subsidized.

C2: The banking industry failed out of moral hazardous behaviors the auto industry failed due to lapse demand.

In any economic retail system we can agree that it runs based off of supply and demand. This did not apply in 2008 when two automobile manufacturing organizations where threatened with bankruptcy due to shrinking demand. These automobile manufacturers did not however fail as the government stepped in and declared them TBtF, Let us examine this notion of these auto manufacturers being TBtF, pre recession the auto manufacturers employed 1.1 million people. [3] In the United States there were in 2008 304.1 million people. [4] Assuming that every automobile manufacturer were to declare bankruptcy, unlikely as Chrysler and GM were the two companies most affected by the recession; also assuming that none of the workers were to gain new employment, also highly unlikely, we would see a mere .3617% increase in unemployment. Not to mention that these automobile manufacturer's are failed bailout Investments, with GM failing to pay $11.4 billion, and Chrysler failing to repay $1.35 billion. [5] These failures on by these companies to repay money borrowed are a weight on the taxpayers. Long term planning for the economic malaise that haunts us now is the reason that TBtF should not be instituted.

[1] http://www.thegoldstandardnow.org...
[2] http://www.fas.harvard.edu...
[3] https://www.cars.com...
[4] https://www.google.com...
[5] https://projects.propublica.org...
lannan13

Con

I concede.
Debate Round No. 3
Mfuss

Pro

If we look into the longer term economic horizon we see that the subsidisation of an economic entity to necessitate its survival will lead to the peril of that entity. We can look at the disaster of GM, which we are still bailing out because of the governments failure to let the organization fail. [1] Now the automobile manufacturers were the most notable companies to fail, that being said, the larger problem of failure is yet to come. The banking industry which received over an 80% lions share of the bailout have simply written off the federal funding on their balance sheets through manipulation of LIBOR rates and federal borrowing and repayment of aforementioned rates. Unfortunately I have yet to publish my research on this issue so I have no hard data to back this, however the banking industry paid back a menial 31.86% of the federal money borrowed however it states on any research engine that they have fully paid back the debt. This is a huge problem as this will affect the consumers in their buying power and lead to longer recessionary times, as well as place insecure weights on the Federal balance sheet.

A metaphor that one can bring to mind when considering this is a person who has lost full function of an appendage due to a cancer. This person is given an antibiotic regiment that will allow some, very limited, functional use of their arm, and this person is only allowed to use their arm how the doctor says they can and not any other way. The person will be plagued with limited functionality at best and will in the end die as cancer is malignant. We cannot let our country fall to the cancer we must remove the appendage before we fall to the malignant, systemic and global problems that the toxic debt holds for us.

[1] http://money.cnn.com...
lannan13

Con

Concession.
Debate Round No. 4
Mfuss

Pro

One final chance for opposition.
lannan13

Con

Concession.
Debate Round No. 5
4 comments have been posted on this debate. Showing 1 through 4 records.
Posted by Sourec 1 year ago
Sourec
Hmmm... too big to fail is a bit off. Yes, a big corporation failing would have a massive economic impact, but you know what's better than trying to keep it afloat? Cushioning its fall. Help the thousands out of a job into new jobs, and provide for them until they find a job (something like that). If the company failed before, there's a good reason to believe it'll fail again; better to let the dead lie still in their graves than raise a zombie.
Posted by Lovetheworld4real 1 year ago
Lovetheworld4real
The phrase "too big to fail" is generally applicable to modern day civilization. However, even the largest industry in the country( the food industry) is being harshly criticized. Ever heard that the bigger they are the harder they fall?
Posted by Mfuss 1 year ago
Mfuss
It is against Too Big to Fail altogether. Your point is true and valid however the too big to fail doctrine would not apply to a developing nation it applies to developed nations and developed corporations rather than 'startups', if you will.
Posted by Lavaguava 1 year ago
Lavaguava
Is your argument against too big to fail altogether, or are there exceptions, such as in developing nations, where government funding is beneficial?
1 votes has been placed for this debate.
Vote Placed by Midnight1131 1 year ago
Midnight1131
Mfusslannan13Tied
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Total points awarded:30 
Reasons for voting decision: Concession by Con.