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The Global Financial Crisis: Analysis and Policy Implications
What began as a bursting of the U.S. housing market bubble and a rise in foreclosures has
ballooned into a global financial and economic crisis. The world now appears to have entered a
global recession that is causing widespread business contraction, increases in unemployment, and
shrinking government revenues. Some of the largest and most venerable banks, investment
houses, and insurance companies have either declared bankruptcy or have had to be rescued
financially. The world is facing the worst economic conditions since the great depression. Nearly
all industrialized countries and many emerging and developing nations have announced economic
stimulus and/or financial sector rescue packages, such as the American Recovery and
Reinvestment Act of 2009 (H.R. 1, 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 for governments.
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 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. Some are characterizing these
meetings as Bretton Woods II. On April 2, heads of the G-20 nations met in the Leaders' London
Summit and announced measures to bolster the international financial institutions, stabilize the
world economy, and reform and improve the financial regulatory system. The fourth phase of the
process is dealing with political, social, and security effects of the financial turmoil. Significant
foreign policy implications of the crisis are now emerging.
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, Congress plays a key role in generating policy options and informing the public. On
the regulatory side, the largest questions seem to be how U.S. regulations should be changed and,
if changed, how closely those changes are to be 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?
Where would enforcement authority reside; at the state, national, or international level? Congress
also plays a role in measures to reform and recapitalize the International Monetary Fund, the
World Bank, and regional development banks.
Congressional Research Service
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The Global Financial Crisis: Analysis and Policy Implications, report, May 12, 2009; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc818085/m1/2/: accessed April 22, 2019), University of North Texas Libraries, Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.