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Monday, February 22, 2010

CRS Issue Statement on the Recession: Restoration of Financial and Credit Markets

Baird Webel, Coordinator
Specialist in Financial Economics

The current financial instability became widely apparent in the credit markets in August 2007. Although initially thought to be limited to subprime mortgages, increasing defaults on prime mortgages caused losses that rippled through the financial system. To a large degree, the system of financial intermediation has broken down, with the basic trust between institutions eroded to the point that previously routine trades were occurring only with high risk premiums, if they occurred at all. The effects have been particularly severe because U.S. mortgage-backed securities had previously been viewed as very low risk investments and were very widely held around the world. Thus, what was initially a slowdown in the U.S. housing markets has taken on global dimensions. 

Beginning in early 2008, multiple failures in large financial institutions prompted case-by-case government interventions to address these failures. Dissatisfaction with these ad hoc responses was cited by the Treasury in proposing a broader response focusing on government purchase of troubled mortgage-related assets, hoping to stem uncertainty and fear by removing these assets from the financial system. In early October 2008, Congress passed, and the President signed, the Emergency Economic Stabilization Act of 2008 (EESA, Division A of H.R. 1424/P.L. 110-343), creating the Troubled Assets Relief Program (TARP).

Date of Report: March 5, 2009
Number of Pages: 3
Order Number: IS40380
Price: $7.95

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