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Friday, March 5, 2010

The Global Financial Crisis: Analysis and Policy Implications

Dick K. Nanto, Coordinator
Specialist in Industry and Trade

The world appears to be recovering from the global recession that has caused widespread business contraction, increases in unemployment, and shrinking government revenues. Although the industrialized economies have stopped contracting, for many, unemployment is still rising. The United States likely hit bottom in June 2009, but numerous small banks and households still face huge problems in restoring their balance sheets, and unemployment has combined with subprime loans to keep home foreclosures at a high rate. Nearly all industrialized countries and many emerging and developing nations avoided dropping into another "Great Depression" by implementing sizable economic stimulus and/or financial sector rescue packages, such as the American Recovery and Reinvestment Act of 2009 (P.L. 111-5). Several countries have resorted to borrowing from the International Monetary Fund as a last resort. The crisis has exposed fundamental weaknesses in financial systems worldwide, demonstrated how interconnected and interdependent economies are today, and has posed vexing policy dilemmas. 

The process for coping with the crisis by countries across the globe has been manifest in four basic phases. The first has been intervention to contain the contagion and restore confidence in the system. The second has been coping with the secondary effects of the crisis, particularly the global recession and flight of capital from countries in emerging markets and elsewhere that have been affected by the crisis. The third phase of this process is to make changes in the financial system to reduce risk and prevent future crises. In order to give these proposals political backing, world leaders have called for international meetings to address changes in policy, regulations, oversight, and enforcement. On September 24-25, 2009, heads of the G-20 nations met in Pittsburgh to address the global financial crisis. The fourth phase of the process is dealing with political, social, and security effects of the financial turmoil. One such effect is the strengthened role of China in financial markets. 

The role for Congress in this financial crisis is multifaceted. While the recent focus has been on combating the recession, the ultimate issue perhaps is how to ensure the smooth and efficient functioning of financial markets to promote the general well-being of the country while protecting taxpayer interests and facilitating business operations without creating a moral hazard. In addition to preventing future crises through legislative, oversight, and domestic regulatory functions, On June 17, 2009, the Obama Administration presented a proposal for financial regulatory reform that focuses on five areas and includes establishing the Federal Reserve as a systemic risk regulator, creating a Council of Regulators, regulating all financial derivatives, creating a Consumer Financial Protection Agency, improving coordination and oversight of international financial markets, and other provisions. The reform agenda now has moved to Congress with legislation that addresses many of the issues in the Obama plan but also includes other financial issues. Among the numerous bills in Congress addressing the financial crisis, H.R. 4173 (Wall Street Reform and Consumer Protection Act of 2009, passed the House on December 1, 2009) addresses many of the concerns raised. Congress also plays a role in measures to reform and recapitalize the International Monetary Fund, the World Bank, and regional development banks. 

This report provides a historical account and analysis of the crisis through January 2010. For information on current aspects of the crisis, see other CRS reports.
This report will not be updated. 

Date of Report: February 4, 2010
Number of Pages: 174
Order Number: RL34742
Price: $29.95

Document available electronically as a pdf file or in paper form.
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