That crunch has meant billions of dollars of losses for big banks and investment houses. It has caused the near-collapse of the country's fifth largest investment bank, made it harder for consumers and businesses to get loans and pushed the country to the brink of a recession.
The market turmoil has presented an opening for critics to make the case for strong federal rules to crack down on abuses that they believe were at the heart of the current crisis.
But Treasury Secretary Paulson, who has led the effort to rewrite regulations, rejects that criticism.
"I do not believe it is fair or accurate to blame our regulatory structure for the current turmoil," according to a draft of a speech he planned to give Monday when he outlines the administration's proposals.
In interviews over the weekend, administration officials sought to frame the proposals as an effort to devise a system that would help keep U.S. companies competitive in an increasingly connected global economy.
"Despite the fact that there will be a temptation to view this through a lens of what is happening now in credit markets, this has been a process that has been going on for a year," said David Nason, Treasury's assistant secretary for domestic finance. "These are very complex issues that require a serious amount of debate."
Treasury began work on the review in early 2007. It came in response to complaints from the financial services industry that U.S. businesses were losing their edge in global competition because of over-regulation by Washington.
The yearlong review produced a plan calling for the greatest changes in financial regulation since many of the current oversight institutions were created in the 1930s.
The Federal Reserve would be a big winner, gaining new powers to serve as the protector of stability for the entire financial system. The plan would abolish some institutions such as the Office of Thrift Supervision and the Commodity Futures Trading Commission; their responsibilities would shift to other agencies.
According to a 22-page executive summary obtained by The Associated Press, the Paulson plan envisions a three-stage process that would lead to establishing three main regulatory agencies.
The Fed would sit at the top with expanded responsibilities as the "market stability regulator." But the Fed would lose its current powers over bank holding companies.
The proposal would combine the five agencies now responsible for regulating banks, thrifts and credit unions into a single regulatory agency.
The powers of the Securities and Exchange Commission would go into a super agency responsible for business conduct and consumer protection.
Some in the financial industry are concerned that Congress could rush to legislate. They make the comparison to the Sarbanes-Oxley law, passed in 2002 four months after it was introduced in response to the accounting scandals at Enron and other large companies. That effort produced some unintended consequences that, the industry believes, has hurt the global competitiveness of American companies.
"These are phenomenally complex issues and a thoughtful and deliberative approach is what is needed," Rob Nichols, president of the Financial Services Forum, said in an interview Sunday.
The administration's proposals got a mixed reaction on Capitol Hill.
The chairman of the Senate Banking, Housing and Urban Affairs Committee, Sen. Christopher Dodd, said in a statement the recommendations deserved careful consideration. But the Connecticut Democrat said he believed they "would do little if anything to alleviate the current crisis."
House Financial Services Committee Chairman Barney Frank, D-Mass., said Paulson's plan was a "very constructive step forward."
"By rejecting the argument for the status quo ... he has narrowed, albeit by no means removed, the differences between his position and that of many Democrats," Frank said. He has led the effort to look at regulatory changes needed to prevent a repeat of the current mortgage and credit problems.