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Free «Economic Growth» Essay Sample

Late in the year 2007, Lehman Brothers, and other business entities such as AIG, were earning massive returns, through sale of derivatives, which were supported by risky mortgages (Why Bailing Out AIG Would be a Good Bet). As a result, Lehman Brothers suffered a major financial crisis in September 2008, and eventually collapsed, after the Federal Reserve failed to bail it out. Consequently, the US housing prices started to fall, an effect, which was spread across the globe, resulting into global financial crisis. The situation led to a global panic among financial institutions and other businesses entities across the global. The Federal Reserve finally agreed to intervene, through offering financial assistance (bailing out) to the affected financial institutions, as a way of preventing them from suffering possible collapse like the latter: Lehman Brothers. Bailing out of major banks and other business entities is necessary, since it prevents the world economy from suffering from serious economic crisis, like the one, which was experienced immediately after collapse of Lehman Brothers in 2008.

The decision to bail out major banks, when they suffer from financial problems, is necessary since it prevents the global economy from suffering serious spillover effects of collapse of major financial institutions (Fisher). My opponent made a point, that bail outs of companies and banks, which happened in 2008 was a wrong move, and that money used to bail out these companies and banks could have been used in more useful ways. My counterargument was that recession started right after one of the largest banks, Lehman Brother went bankrupt, and it sparked a wave of crisis, and that without bailing out, other big banks would have collapsed, leading to more serious economic crisis.

According to Fisher, financial stability of major financial institutions is very important for continued international trade among the countries of the world. Fisher observes that the major financial institutions, as well as major companies across the globe, offer great impetus to international traders. Financial institutions allow international traders to import and export various commodities to and from different countries of the world, by acting as financial intermediaries: undertaking huge financial transactions involving different world currencies. On the other hand, major global companies are the major producers of export and import commodities (Fisher). Therefore, the latter are useful in supporting international trade. During financial crisis, bailing out of such financial institutions and other entities is very important in maintaining stability of international trade. Without international trade, many countries of the world cannot be able to survive. This is because; international trade allows countries to acquire what they do not produce, and sell what they produce in excess. In fact, some countries depend on international trade for importation of basic commodities such as clothes and food, Therefore, if these major banks and entities are not bailed out when suffer from financial crisis, many lives would be lost, since some people may not have access to some of the basic needs. It is therefore clear that, the money used to bail out these entities is not lost; instead, it also utilized to undertake useful activities, which involve saving the human life.

Moreover, Farmer points that bailing out of major financial institutions and companies is necessary, since it safeguards private investors, other individual banks, and other individual companies from collapsing as well. Private investors may include individual business entities, who invest with major financial institutions and companies. Their investments may be in a form of pension plans, which provide retirees with constant sources of livelihoods. Therefore, lack of bail out for major banks and companies, may cause collapse of private investors, which in return would cause loss of major investments, which provide livelihoods to many people. In addition, other banks and companies bank with various major banks. If the major banks were allowed to collapse, it would mean allowing all the financial institutions to collapse as well. Financial institutions are important to the global economy, since they act as sources of finance for different economic activities, and custodians of money and other valuable commodities (Farmer).

Bailing out of major financial institutions and companies is necessary to prevent the world economy from suffering serious economic effects due to their collapse. If major banks and companies are allowed to collapse, there would be major implication on international trade and the rest of financial institutions and other entities may collapse as well.


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