Question

Post a citation and a short summary of the article that you found. Describe the problem from the standpoint of how concentration of market power in very large banks affects the overall economy. Analyze the effects of government policy in the market for loanable funds and the effect this has on both individuals and businesses.

Answer 1

The banking industry has seen various changes in the sector such as the financial crisis during the year 2007- 2008, where the banks risked losing significantly following the failure of loan repayments by the unsecured loans holders. The government intervened to bail out the large which they considered having systemic importance to the entire financial system. This paper seeks   to explain the impact of the “too big to fail banks “to the overall economy, individual and the businesses.

EFFECTS OF THE LARGE BANKS DOMINATION IN THE MARKET

The government bailout of the large banks has been termed as the too big to fail policy; this has significantly affected the economy since it has caused inflation in the economy. This was caused by the decline in the federal funds rates and the discount to 1% and 1.75 % respectively. This has also seen the insurance firms encouraging imprudent risk taking since the government will bail out the large financial institutions when hit by a financial crisis (Bernanke, 2013).

The concentration of the market power by very large banks leads to the other businesses being unable to receive payment from their creditors this leads to the companies losing their income that may drive them out of business. The businesses will also be unable to provide financial services to their customer who will lose confidence in them and turn to the large bank. When the customers fail to receive their expected services from the banks and the banks are unable to provide services, the entire economy will be injured (Berlatsky, 2010).

CONCLUSION

In conclusion, too big to fail policy is beneficial to the economy in the short run as has been evidenced in the paper; however, in the long run, it harms the economy. This is because the government caters to the large businesses only and fails to take care of the other small financial institutions. It also utilizes the tax payer’s money to buy the high-risk projects.

REFERENCES

Berlatsky, N. (2010). The global financial crisis. Detroit, MI: Green haven Press/Gale Cengage Learning.

Bernanke, B. (2013). The Federal Reserve and the financial crisis.