Should the U.S. Government Bailout a Failing Bank?

Banks in the U.S. play a significant role in economic development. Banks lend to businesses, contributing to the production growth and lending to the population, increasing consumption in the population. However, some situations can influence the global economy and banks, respectively. For instance, the Great Depression, the most widescale crisis in the U.S., impacted all sectors of the economy, including small and large businesses. This crisis also influenced the bank system of the U.S.; many corporations closed and were announced bankrupt. Today, a similar situation might be provoked by the impacts of COVID-19, when multiple companies have to save themselves from bankruptcy. Banks began to lend more often, and it can lead to negative consequences for them. It is crucial to examine the roles of the bank and government in the U.S. to understand whether the government should bail out a failing bank.

One of the macroeconomic principles is full employment for the population, and it is linked to other goals that include price stability and economic growth. Unemployment, bankruptcy, and general panic became significant concerns in the U.S. population during the Great Depression. President Roosevelt insisted on implementing the Relief, Recovery, and Reform policy. Moreover, there was the CARES Act which gave a slight relief to the inhabitants of the U.S. It was about supporting the working population during the Great Depression. Simultaneously, the government decided to imply the Bank Act of the U.S., which reviewed and reshaped the bank system of the U.S. (O’Sullivan et al., 2017). For example, the act prohibited banks from operating with securities and obliged banks to insure deposits. This act was later modernized, allowing American banks to conduct investment and insurance activities. Therefore, these policies ensured the country possessed the principle of total employment.

After multiple financial waves of panic suffered by the U.S. population, the U.S. government created the Federal Reserve System. The function of this tool was to be a central bank and serve as a lender (O’Sullivan et al., 2017). Moreover, it is responsible for supplying currencies to the U.S. economy, providing a system of financial transaction checks, monitoring inflation rates, holding reserves from other banks, and conducting the monetary policy of the U.S. (O’Sullivan et al., 2017). By operating with inflation, the bank ensures the principle of price stability. The bank also makes a range of activities to provide the principle of economic growth of the country.

The Federal Reserve Bank is one of the twelve banks of the Federal Reserve System, and it is responsible for conducting the abovementioned responsibilities. What is more, the Board of Governors is a part of the Federal Reserve System, and together they make decisions about the monetary policies of the U.S. (O’Sullivan et al., 2017). During the financial crises, the Federal Reserve Bank facilitated the stabilization of the economy with the help of holding more reserves and increasing the bank’s ability to lend in urgent cases (O’Sullivan et al., 2017). It also started to create programs directed at purchasing short-term debts or commercial papers during the collapse of financial institutions in 2008 (O’Sullivan et al., 2017). Therefore, the bank’s role in the U.S. is significant; it conducts monetary operations, monitors transactions, and controls the processes with the currency.

Moreover, after examining the American global crisis of 2008, it becomes apparent that it also strives to provide economic stability. Accordingly, the government plays a significant role in promoting permanence and growth at the federal level (O’Sullivan et al., 2017). The government guides banks in setting taxation rates and prices; it also controls the use of credit and might adjust the speed of economic growth.

Using the principle of comparative advantage, where the two biases are compared to weigh the advantages and disadvantages of any decision, it is vital to decide whether the government should save failing banks. There are multiple opinions on this issue; for instance, it is worthy because the financial safety of the population may depend on the banks in which people invest. It is also significant that banks give people an opportunity not to lose their jobs (O’Sullivan et al., 2017). Many people need banks to get loans for their needs, and the complete failure of banks may provoke panic and collapse among the population.

For instance, the case with Bear Stearns showed that mortgage collapse caused a financial crisis that resulted in a global financial panic among investors and the people. There was considerable instability in the bank’s system that led to the crush of the housing sector. Interest rates on mortgages increased, and at the same time, securities backed by mortgage bonds were completely depreciated (O’Sullivan et al., 2017). The population was not ready to pay off higher rates, and people missed many monthly payments. Significant reduction in investment abilities led to reducing in the volume of trading in mortgage objects. Therefore, the bank’s failure resulted in people’s mortgage panic and investors’ unwillingness to invest in failing mortgage opportunities. However, one can argue that bailing out banks cause other problems such as oligopoly and promotion of external international debts, facilitating the free market. However, it becomes clear that the bank’s failure benefits neither inhabitants and clients of housing sectors nor investors.

The government of the U.S. should bailout failing banks for multiple reasons. For instance, failure in banks stops the overall economic growth. Moreover, it influences the population and creates unstable situations leading to panic in people. Bailing out banks also facilitates employment, which is one of the most prominent economic principles. Investors and stakeholders depend on banks as well; thus, it is essential to provide financial stability. Therefore, it is vital to save banks to ensure financial permanence and provide successful economic growth.


O’Sullivan, A., Sheffrin, S. M., & Perez, S. J. (2017). Macroeconomics: Principles, applications, and tools. (9th ed.). Pearson.

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