Late in the House Financial Services Committee hearing today with Tim Geithner, Ben Bernanke and Bill Dudley, California Democrat Joe Baca asked Bernanke an interesting question: When did the financial system break? What year did everything go bad? Bernanke demurred, but I have an answer: 2003, or maybe 2004.
It was late in 2003 that subprime lending first truly exploded, and when Wall Street pushed aside Fannie and Freddie to become the main buyer of mortgage loans. It was in 2003 that house prices went from mere rising to outright climbing. It was around 2003-2004 that the Icelandic banking system first began growing like gangbusters. It was in 2003 that global trade began its sharp rise as a share of global GDP. It was in 2004 that Trader Monthly was founded. And so on. It was the beginning of the explosion in debt that left the financial system so staggeringly fragile.
Why then? I really don’t know. I find the popular explanation that it was all Alan Greenspan’s fault for keeping the Federal Funds rate at 1% in late 2003 and early 2004 pretty unsatisfactory. But I don’t have a better one.