America’s Financial Crisis: The End of an Era

Source: Barry P. Bosworth, Aaron Flaaen, Brookings Institution, April 14, 2009

From the summary:

This paper summarizes some research on the origins of the crisis, traces the evolution of the credit panic that hit in late 2008, its impact on the real economy, and the extraordinary policy actions that have been taken to mitigate the economic losses. As with past financial crises, the current downturn will end and the economy will recover. However, as we argue below, the crisis is likely to come to represent a major regime change, greatly altering the future shape of the U.S. and global economies. The era of self-regulation of financial institutions is over, and the role of monetary policy has been greatly altered. The binge of consumer spending also seems to have come to an end, as households focus on rebuilding their balance sheets. If the United States is to restore full employment, it must not only rebuild its financial industries but also rejuvenate its export industries and achieve a more balanced external position. This raises two challenges for the rest of the global economy. First, it must develop new drivers of demand growth; countries will not be able to rely on growing exports into the U.S. market, and they will need to emphasize the development of domestic and regional markets. Second, frustration with the effort to develop export markets in a time of slow global growth may push politicians toward a more protectionist policy stance.

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