The U.S. Financial Crisis: The Global Dimension with Implications for U.S. Policy Page: 2 of 88
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The U.S. Financial Crisis: The Global Dimension with Implications for U.S. Policy
What began as a bursting of the U.S. housing market bubble and a rise in foreclosures has
ballooned into a global financial crisis. Some of the largest and most venerable banks, investment
houses, and insurance companies have either declared bankruptcy or have had to be rescued
financially. In October 2008, credit flows froze, lender confidence dropped, and one after another
the economies of countries around the world dipped toward recession. The crisis exposed
fundamental weaknesses in financial systems worldwide, and continues despite coordinated
easing of monetary policy by governments, trillions of dollars in intervention by governments,
and several support packages by the International Monetary Fund.
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. This has required extraordinary measures both in scope, cost, and extent of
government reach. The second has been coping with the secondary effects of the crisis,
particularly the slowdown in economic activity and flight of capital from countries in emerging
markets and elsewhere who 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. Some are characterizing these
meetings as Bretton Woods II. On November 15, 2008, a G-20 leaders' summit recommended
several measures to be implemented by participating countries by March 31, 2009. The fourth
phase of the process is dealing with political and social effects of the financial turmoil.
The role for Congress in this financial crisis is multifaceted. A major issue 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, Congress has been providing funds and ground rules for economic
stabilization packages and informing the public through hearings and other means. The largest
question may be how U.S. regulations should be changed, if necessary, and how closely any
changes are harmonized with international recommendations. Other questions include: should the
United States promote global regulatory standards to be voluntarily adopted by countries or
should a supranational regulatory institution be created that would impose rules on international
financial markets? Where would enforcement authority reside; at the state, national, or
international level? Congress also plays a role in measures to reform international financial
institutions and in recapitalizing the International Monetary Fund. Also, should U.S. policies be
designed to restore confidence in and induce return to the normal functioning of a self-correcting
financial system or has the system, itself, become inherently unstable?
This report will be updated periodically.
Congressional Research Service
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The U.S. Financial Crisis: The Global Dimension with Implications for U.S. Policy, report, December 31, 2008; Washington D.C.. (digital.library.unt.edu/ark:/67531/metadc810983/m1/2/: accessed November 18, 2018), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.