The big banks were too big to fail from "summary" of The Big Short by Michael Lewis
The big banks were so enormous and interconnected that if one failed, it could bring down the entire financial system with it. This created a paradox where these institutions were considered both too big to fail and too big to be allowed to exist. The big banks had become so intertwined with the global economy that their collapse would have catastrophic repercussions worldwide. This realization led to a belief that the government would step in to bail them out in times of crisis, as their failure would be too disastrous to contemplate.
The concept of being too big to fail also created a moral hazard, as it allowed these institutions to take excessive risks without fear of the consequences. Knowing that they would be rescued in times of trouble, the big banks engaged in risky behavior that ultimately led to the 2008 financial crisis.
Despite the massive bailouts provided by the government during the crisis, the idea of too big to fail remains a contentious issue. Critics argue that it creates a system where certain institutions are insulated from the normal market forces of risk and reward, leading to further instability in the financial system.
The aftermath of the financial crisis highlighted the need for reforms to address the issue of institutions being deemed too big to fail. However, the debate continues as to how best to regulate these institutions to prevent another crisis of such magnitude from occurring in the future.
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