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?

  • 7
    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 7:44
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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 8:26
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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
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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. 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

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