The world now faces the worst financial and economic crisis since the Great Depression. The bursting of the U.S. housing market bubble has sparked a ripple effect that has grown to major proportions and is wreaking havoc on market after market and country after country as it works its way around the world. The sudden loss of trillions of dollars in wealth, the addition of tens of millions of people to the ranks of the unemployed, and historic drops in economic activity have combined to create new challenges for policymakers. While the current focus is on measures to recover from the financial and economic turmoil, the uncertainty and socio-political forces being generated are creating political instability, heightening security risks, and affecting U.S. interests in ways that could hardly have been imagined just a year ago. This report provides an overview of the major non-financial impact of the global financial and economic crisis—both actual and potential. Although the eventual effects of the crisis are yet to be determined, looking back at the Great Depression, it is clear that a prolonged and widespread economic contraction can lead to major shifts in governments and acts of desperation that can be catastrophic in nature and far reaching in effect. International Monetary Fund Managing Director Dominique Strauss-Kahn recently stated that as the crisis spills over into developing countries, millions will be pushed into poverty and unemployment, and, for many countries, this will be at the roots of social unrest, some threat to democracy, and for some cases may also end in armed conflict. The forces that determine foreign policy and provide a foundation for the basic paradigms that underlie policy initiatives tend to have a long history and a momentum of their own. Therefore, the ultimate effects of the global financial crisis likely will depend on the length and severity of the global recession. If, as many economic forecasts indicate, the global downturn is U-shaped with a recession that lasts for about two years and recovery beginning in late 2009 or in 2010, the long-term effects are likely to be more of an exacerbation of previously existing trends rather than revolutionary direction-changing events except in particularly dire situations. However, if the global recession takes an L-shape with prolonged contraction and stagnation, much like the Great Depression, the probability rises that changes will be more than mere blips in a continuum but significant turns in the road. As the crisis has progressed, policymakers have moved from rescues of financial institutions and loosened monetary measures to shoring up manufacturers in the real economy and expansionary fiscal policy. Now the crisis is extending into political and security concerns and is affecting fundamental issues such as basic economic philosophy or the underlying assumptions about the workings of market based economies. Some wonder if a statement by Albert Einstein may not apply here: The significant problems we face today cannot be solved at the same level of thinking we were at when we created them. As indicated in Figure 1 , the financial crisis began with a rising default level in subprime mortgages, bankruptcies, an overextension of credit and then a freezing of credit markets, and excessive financial bets on securitized debt obligations mainly in the United States but also in Europe. This has now grown into a global financial crisis with wildly diverse effects. At first, the crisis was transmitted through the globally interconnected financial system primarily among industrialized countries. As the economies of North America, Europe, and East Asia slowed or dropped into recession, the concomitant drops in commodity prices, international trade flows, and remittances along with tightening credit, and depreciating currencies (relative to the dollar and, in cases, the euro) caused similar contraction in growth in developing and emerging market countries. This, in turn, has caused social and economic effects that pose the foreign policy challenges discussed in this report, and which ultimately can lead to a greater role for international financial institutions and a weakening of pro-United States and pro-Western sentiments and ties. Some of the specific effects being created or exacerbated by the financial crisis are shown in Table 1 . These include changes in the U.S. leadership role and in international relations both among countries and between the United States and other nations. The enhanced role of the International Monetary Fund both as a lender of last resort and coordinator (along with the Financial Stability Board) of international financial regulatory reform is particularly notable. Among the fundamental philosophies being affected are the rise of state capitalism, trade protectionism, and doubts about what has been seen as the Western economic model of market-based capitalism. Security issues include rising poverty and conditions that could provide ready recruits for religious extremism in certain countries of Africa and South Asia and budgetary pressures that could constrain security related expenditures. Among the challenges stemming from the economic and financial fallout from the crisis are questions about the primacy of the United States and the role of the dollar as a reserve currency, problems for developing nations caused by diminished inflows of capital and remittances and declining exports and prices for commodities. The role of Congress in this aspect of the crisis is multifaceted and broad based. As of early 2009, the major policy focus has been on containing the crisis and doing what is necessary to promote recovery and reform in financial markets both in the United States and abroad. Congress has a particular role to play in protecting the national interest; informing the public and managing public expectations; budgeting for economic assistance, diplomacy, and defense; determining trade policy; providing capital for the International Monetary Fund and Multilateral Development Banks and determining their role relative to the U.S. government; and ensuring that the U.S. grand strategy in dealing with the world succeeds. Several committees in both the Senate and House already have held hearings on the foreign policy and security implications of the global financial crisis. How severe is the global financial crisis? On March 19, 2009, t he International Monetary Fund projected global economic activity to contract by ½ to 1% in 2009—the first such fall in 60 years. Figure 2 shows projected growth rates by quarter (annualized) by Global Insight, an econometric forecasting firm. As can be seen, countries of the world are experiencing a simultaneous downturn with the advanced industrialized countries of North America, Europe, and Japan dropping into recession and a significant slowdown in economic growth rates in both developing countries and in emerging markets in Eastern Europe. Particularly noteworthy are the growth rates for China which still is positive but down considerably, and those for Japan (the second largest economy in the world) and Ukraine (an example of a particularly hard-hit economy), both facing severe recessions. These declines in economic activity have combined with trillions of dollars lost in equity markets and a credit squeeze that not only is affecting households and businesses world wide but is putting a damper on the financing of activities such as world trade and oil exploration. The International Labor Organization has noted that after four years of consecutive declines in world unemployment, the number of unemployed persons had increased in 2008 by 14 million. As the crisis continues to spread and job losses mount, worldwide unemployment could increase by at least 38 million by the end of 2009. Exports of goods and services provide the main vehicle for countries to generate the foreign exchange necessary to pay for imports and to repay international debt. A deficit in a country's balance of trade also tends to depress the value of its currency which then raises the cost of debt service for governments, businesses, and households that have borrowed in international currencies. This is a particular problem for Eastern European nations whose public and private debt often is denominated in euros or Swiss francs. Also, in many less developed countries, the decline both in volume and price of exports of minerals and agricultural commodities undermines the basic levels of income for large segments of the working poor. Figure 3 shows estimates of the change in export levels in February 2009 compared with that a year previous. For the world, advanced economies, and emerging markets, exports were estimated to be down about 25% (Japan's were down 49%). For developing countries, however, exports were down by more than a third. Exports were down from 9% to 64% for the other countries indicated. These are historic drops in trade volume. Even though imports also are falling, the shrinking of international trade is adding to the contraction in global economic growth and causing unemployment rates to rise and pushing more people into poverty. As the crisis has spread, the adverse macroeconomic effects are reverberating back to further weaken financial institutions, currencies, and equity markets. This is working to exacerbate adverse long-term effects that may affect U.S. foreign policy and, ultimately, U.S. security. Any event of the magnitude of the global financial crisis generates unanticipated effects and this particular set of events seems to be driving states to adopt policies unprecedented in recent times. The financial crisis can be divided into four overlapping phases, each with a different focus. The first has been to contain the contagion and strengthen financial institutions through various financial packages aimed at restoring balance sheets of financial institutions and confidence in markets. Although the worst of the credit crunch seems to have subsided, the inventory of legacy "toxic" assets still has curtailed the ability of banks to lend and, combined with depressed equity values, is threatening insurance companies, pension funds, and investments held by a large swath of households and institutions across the world. The second phase of the crisis has been to deal with the slowdown and recession in world economies through various stimulus packages and other measures. The third phase has been to change financial regulations and build oversight and a regulatory architecture designed to prevent future crises and correct past abuses of the system. The fourth phase has been to deal with political and foreign policy effects of the crisis. On February 12, 2009, the U.S. Director of National Intelligence, Dennis Blair, told Congress that instability in countries around the world caused by the global economic crisis and its geopolitical implications, rather than terrorism, is the primary near-term security threat to the United States.