For the many global companies affected by the US business climate, an obvious question in the wake of the financial system’s recent upheaval is the likelihood and extent of impending changes in the country’s regulatory, political, and structural environment. History provides three clear lessons: first, reforms followed every major US financial crisis that led to an economic downturn. Second, the length and severity of the postcrisis recession have historically been approximately proportional to the degree of change that follows the recession. Finally, the resulting shifts commonly extend well beyond the financial-services sector.
Mild recessions, like those of 1990–91 and 2001, have typically led to piecemeal regulatory reform (exhibit). Steeper downturns portended seismic changes, such as major political realignments and even revolution. (Scholars are just now recognizing the important role that the real estate bust of 1764–68—when land prices fell by half to two-thirds in about a year and thousands of Americans ended up in debtors’ prison—played in the imperial crisis culminating in the events of July 1776.) Similarly, the Panic of 1857 in the United States and the subsequent recession helped bring on the Civil War by exacerbating sectional tensions over slavery and states’ rights and helping the modern Republican Party to coalesce. During the Great Depression, some historians believe, the federal government averted rebellion thanks only to the extraordinary changes ushered in by the first New Deal.
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