The catchphrase “too big to fail” is used to describe financial institutions believed to be so critical to economic health that they cannot be allowed to fail if they develop financial troubles. When such entities appear to be in trouble, government assistance may be provided to help them correct the problem and reestablish themselves. The economic policy of stepping in to prevent failure of key businesses became a topic of much discussion and debate during the financial crisis of the 2000s, when government bailouts of major companies and industries were used in an attempt to stabilize the economy.
There are several arguments behind the idea of a business being too big to fail. The first is that some businesses are so large, they can make up a significant part of an economic sector, and their failure could cause the sector to crash, damaging the economy. In addition, the failure of companies large and small has the potential to take other businesses down with them, as all companies maintain professional relationships with partners like suppliers. When a major source of orders disappears, a smaller company may flounder, and a ripple effect is created.
In addition, the failure of big companies is seen as a blow to consumer confidence. When a company is too big to fail, it plays a prominent role and investors may rely on the company's fortunes as a bellwether for the economy. If the company fails, investors may panic, pull out of other investments, and create more economic problems.
Critics of the concept argue that no business should be so large that it can cause economic damages if it goes out of business. These critics say that a better way to handle major company failures would be to limit them by breaking companies up, preventing them from getting too large, and allowing companies to fail if they are in economic trouble. A survival of the fittest approach to economic welfare argues that companies should not be rewarded for being on the verge of failure with assistance from the government.
The application of “too big to fail” was somewhat uneven in the eyes of some critics. Some large companies that might have expected government assistance were allowed to fail, while others were not. Critics pointed to the selective support for specific businesses and economic sectors and suggested it interfered with the operations of the free market and undermined investor confidence.
