The Bubble Decade

It is befitting that Time magazine made Bernard Bernanke, the chairman of the Federal Reserve, the US central bank, as its "Man of the Year" for 2009.

Surely, the decade of 2000-09 will go down in history as the decade of the forming and bursting of one of the biggest financial bubbles ever.

Though this was the decade of 9/11, followed by the US invasions of Afghanistan and Iraq, the economic ups and downs may have put more of a signature on the decade 2000-09 than even those world-altering events.

The decade of 2000-09 began with an economic smarting due to the dissipation of the personal computer-internet boom.

The PC-internet boom was a major technological epoch covering more than the previous decade.

It had brought about high and sustained economic growth to the US and most of the world. But by 2000, not only was the technological epoch over, but the financial bubble that had accompanied the real growth had also burst.

As the US economy was floundering around aimlessly, the only policy issue being talked about was the Bush tax cuts, which once implemented transformed the US government's annual budgets from surpluses to deficits.

And then came 9/11. Wall Street crashed in the ensuing days, and there was a serious concern that the US would go into a downturn.


The artificial US housing boom in early 2000
led to the financial crisis [GALLO/GETTY]

In response, the Fed [the US federal bank] under Alan Greenspan started creating money at an unusually high rate.

This brought the Fed's lending rate to commercial banks to one per cent and sometimes even below.

The Fed continued to pump money into the banking system for a long period of time, making it one of the longest binges of money creation in it's history.

Where was all this liquidity supposed to go? As mentioned before, there was nothing happening in the real economy once the PC-internet boom was over.

Most of this money found its way into the real estate sector, and by 2003 a real estate boom had begun in the US.

The boom was not driven by construction as it was in China, India and Dubai, but mostly by Americans turning over the existing stock of housing among each other.

This artificial boom was the cause of the financial crisis in the latter part of the decade.