U.S. house prices had peaked in 2006, and strains in the subprime mortgage market grew acute over the first half of 2007.2 By August, liquidity in money markets had deteriorated enough to require the Federal Reserve to take steps to support it.3 And yet the discussion here at Jackson Hole in August 2007, with a few notable exceptions, was fairly optimistic about the possible economic fallout from the stresses apparent in the financial system.4 As we now know, the deterioration of liquidity and solvency within the financial sector continued over the next 13 months.
Accumulating strains across the financial system, including the 1 / 10  BIS central bankers' speeches  collapse of Bear Stearns in March 2008, made it clear that vulnerabilities had risen across the system.