Economics

The Golden Collapse

Believe it or not, there once was a market crash where participants paid the consequences.

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Where were you when the bubble burst, Daddy?

No, not the housing bubble (see Paul Thornton's "The War on Renters," page 19) and the ensuing wipeout at the exotic edges of the credit market, a contraction so grave that it has jeopardized such nonsubprime economies as Iceland's. Nor am I referring to the severe early-'00s overvaluation of the U.S. dollar, a now-forgotten artifact of irrational exuberance that was nonetheless obvious enough back in 2001 that even a nonanalyst like me was urging Americans to enjoy those cheap European vacations "before the currency bubble bursts." (The greenback has almost halved its value against the euro since then.)

I'm talking instead about one of the most beautiful and under-appreciated collapses in modern financial history: the great dot-com crash of 2000, when NASDAQ lost 10 percent of its value in just one day, Pets.com went from $1.2 million Super Bowl commercials to $82.5 million initial public offerings to full liquidation within 11 short months, and the nation's professional chin strokers transformed themselves from envious and befuddled New Economy spectators to world-weary bringers of harsh business truths. The air was thick with a vindictive Schadenfreude directed at those Generation Xers who had the bad manners to make fortunes (or just an interesting living) while experimenting with new technology during what until recently had been called the Long Boom.

"One minute you've got zip-drive techies pulling all-nighters amid their look-at-me-I'm-wacky workstations, and the next moment—poof—it seems so stale," New York Times pop sociologist David Brooks wrote in May 2001. "Suddenly, it doesn't really matter much if the speed of microprocessors doubles with the square root of every lunar eclipse (or whatever Moore's Law was)."

Late-breaking Old Media gold diggers like Space.com co-founder Lou Dobbs woke up the morning after, presumably feeling a bit ridiculous, while analog-world moguls like Pop.com's Steven Spielberg and David Geffen quietly folded shop before the ice was sculptured for the launch party. Retirement-age investors who saw their NASDAQ-heavy 401(k)s cut in half seemingly overnight were derided as "greater fools" who got what they deserved for buying into the 21st-century equivalent of tulip mania. Even some of the tech industry's long-toiling observers took vicious aim at the bubble blowers. In April 2000, longtime PC Magazine grump John C. Dvorak warned darkly (and inaccurately) of "a depression that will rival 1929." Newly popular sites such as Net Slaves and Fucked Company reveled in the spectacular—and occasionally criminal—flameouts of such buzzword-slinging, broadband-dependent money burners as the Internet Entertainment Group (IEG) and the Digital Entertainment Network (DEN).

I was a gleeful participant both in the last great days of the dot-com boom (when I worked briefly at the aforementioned DEN) and the first grim days of the bust. Despite the considerable hit that the wave of tech publication closures had on the pocketbooks of freelancers like me, it was terrific fun to have post-crash sport at the expense of jargon-addicted IPO charlatans and Koolaid-drinking late adopters, and there was a hope in those days that the post-crash Web would revert to the individual, low-budget level of wacky experimentation and cheap humor. That hope, we have seen, has turned out well.

But what turned out best of all, and what has the most relevance to today's various economic busts, was the regulatory response to the technology crash: a grand, collective shrug.

Like the subprime collapse of 2008, the dot-com bust of 2000 took place during a heated presidential campaign. Yet the tech bubble didn't merit a single mention in any of the presidential or vice presidential debates that fall. The Federal Reserve responded to the 2000 contraction by using the main mechanism at its disposal: repeatedly slashing interest rates (a move, many say, that helped inflate the next bubble). The Fed is responding to 2008, on the other hand, by proposing vast new mechanisms for itself, including regulatory oversight of investment banks, new rules for credit rating agencies, and authority over such far-flung sectors as insurance and commodities trading.

Even the villains of the dot-com collapse mostly came out smelling like roses. Remember Mary Meeker? She was the "Queen of the Net," a Morgan Stanley analyst who midwifed Netscape's IPO and championed scores of others, including eventual busts like Drugstore.com. After the dot-com crash she was crucified as a walking conflict of interest, investigated for fraud, and quickly forgotten as a pop culture figure. Now? She's still a managing director at Morgan Stanley, still championing the technology boom (this time, in China), and has long been cleared of all charges. Meeker's colleague Henry Blodget, after paying a $2 million settlement on a securities fraud charge levied by then–New York Attorney General Eliot Spitzer, left Wall Street and founded the thriving tech blog Silicon Valley Insider. Even that stock-picking loudmouth James Cramer, who was temporarily disgraced for having said in February 2000 that Internet stocks "are the only ones worth owning right now," was quickly rehabilitated as the ubiquitous host of CNBC's Mad Money.

The only substantial "reform" that came in the wake of that crash was the disastrous Sarbanes-Oxley Act of 2002, a make-work program for accountants that was more a reaction to the shoddy internal reporting of Enron, Adelphia, and WorldCom than it was to the fantasy-based price/earnings ratios of fill-in-the-blank.com.

What were the nefarious effects of the surprisingly laissez-faire attitude toward tech stock de-listings and baby boomer NASDAQ wipeouts? The Dow Jones recovered its 2000 highs by 2006, and even tech-heavy NASDAQ has more than doubled its value since post-crash lows in October 2002. The United States, led by the ongoing information revolution, has continued to innovate and thrive, with only a few minor macroeconomic hiccups in 15 years of robust growth. The broadband dream that seemed so far off in 2000 has long since become a reality: It's YouTube's world; we just live in it.

Eight years ago, as the freelance contracts dried up and the nation knuckled down for a presidential race that turned out even more tedious than predicted, my sympathies were with Tim Cavanaugh, then of Suck.com, now a freshly minted reason columnist (see "Classical Gasbags," page 62), who wrote: "It was a wild ride, and now it's over. The spectacle of an industry in full retreat might be good for a few chortles, but it's the kind of laughter you try to choke back at a funeral. We remember the whole story; we know it was a golden age; and we know better than to join in the exultation of dot-com backlashers, old economy scolds, or now-jobless economic naïfs still excited over the prospect that San Francisco housing rates might fall."

In fact, the dot-com collapse was better in retrospect than we could have ever predicted in its wake. By becoming associated in the popular imagination with the kind of loathsome young techno-weenies immortalized in such films as Office Space and Startup.com, by headquartering itself in the always loathable (and self-loathing) San Francisco, and by spawning an entire self-caricaturizing literature of New Economy boosterism, the Internet bubble was allowed to inflate and burst the old-fashioned way—privately, as the result of transactions between consenting adults.

So add another arrow to the quiver of nostalgia for the 1990s. We will tell our disbelieving grandchildren that there once was a time when you could board an airplane without removing your shoes, travel all over the Western Hemisphere without flashing a passport or submitting to an eyeball scan, and engage in risky, exciting economic behavior knowing full well that you'd actually have to pay the consequences. (Well, unless you're James Cramer.) Say what you will about Generation X, but we were never too big to fail.

Matt Welch is reason's editor in chief.

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  1. What I love is that something like this can spring up in a few years:

    http://www.nytimes.com/imagepages/2008/02/17/business/20080217_SWAP_2_GRAPHIC.html

    but e-gold is “the problem.” (NYT caption of “unregulated” is wrong, the Feds can send people with 9mm pistols at ANY time they want, believe me!).
    JMR

  2. I was an IT consultant at the time of the crash. In the space of no more than a month, I went from people fighting each other to hire me to being unable find any work whatsoever.

    The crash was the best thing that ever happen to me.

  3. I was at a software consulting company that died a merciful death early in the downturn, and jumped immediately to another startup in late 2000. I’ve been there ever since. The crash was the best thing that happened to the software industry, because cleaned out a lot of the crappy developers that were taking up space in our industry and pumping out awful code. There are still plenty here, but history majors that decided to get into development because “that’s where the money is” were forced out.

  4. When talking about the .com bubble, you can’t overstate the roll of Y2K. It was the high mark of conspiracy theory. Actually Y2K wasn’t a conspiracy as such, but the ‘end of the world’ rhetoric was ripped from the same page. Somehow the chicken littles managed to convince the gray-haired fogies in the three piece suits up on the sixteenth floor that ‘this time it’s for real’. Every company in America, even the ones that made a profit, spent the last two years of the millennium rewriting code and upgrading hardware. Come the year 2000 and everybody had all the latest hardware and software they could possibly want *POP*

  5. It was fun and exciting. I remember having meetings with venture capitalists and angel investors, demonstrating how great our software was (it was), and still failing to break into the big time. I still made a lot of money, gained a lot of valuable experience, and enjoyed myself.

  6. 66 milion people in the US have broadband:

    http://en.wikipedia.org/wiki/List_of_countries_by_broadband_users

    That’s about what, 22.5ish percent?

    Pardon me if I’m not yet decorating for the Brave New World party.

  7. No, there are 66 million subscribers in the U.S. If you multiply that by a conservative 2.0 (for a small household), you would have 132 million, which is closer to 45%. In reality, broadband penetration for the U.S. has generally been reported as over 50%.

  8. on the pocketbooks of freelancers like me

    Matt carries a pocketbook. Haha.

    I remember seeing my clients’ capital gains from the late ’90s, and then seeing them in 2000, 2001. Lots of QQ.

  9. I had a college prof in electronics 99′ and 2000 that owned the local internet company (all dial up.) His reason for the .com crash was this. The investors in those companies were investing more in ideas than in goods. When the govt. went after Bill Gates, it made those investors very very nervous and they moved their money into more “legitimate” investments.
    IOW the govt. caused the .com crash.

  10. I had a college prof in electronics 99′ and 2000 that owned the local internet company (all dial up.) His reason for the .com crash was this. The investors in those companies were investing more in ideas than in goods. When the govt. went after Bill Gates, it made those investors very very nervous and they moved their money into more “legitimate” investments.
    IOW the govt. caused the .com crash.

    My theory is that it made the investors nervous when the government stopped going after Bill Gates. My theory fits the timing better and makes more sense.

  11. It was expected at the time that a lot of internet companies would fail. Investing in tech companies was kind of like playing the lottery. At the time, people were making parallels to the auto industry at the start of the 20th century. At that time, there were hundreads of companies making cars, now there are just 3 major US automakers.

  12. I know it’s forbidden to utter his name here, but Reason sucks, so here goes: Ludwig von Mises!

    The causes of the boom/bust cycle is well known. Democrats and Republicans tend to economic ignoramuses, but I didn’t expect to see statist mythologizing on a libertarian site. Expansion of the monetary supply (inflation) causes over-investment in production capital. Eventually consumer demand falls behind, and the bust occurs. The business cycle isn’t caused by sunspots, or Republican administrations, or lack of government spending, or anything like that. It’s caused by monetary inflation. Yes, speculators have a lot to do with it, but cheap credit encourages speculation.

  13. p.s. If the name Mises is too paleo for you, check out Hayek instead.

  14. All this happened in 2000?
    Funny, I don’t remember the Clintons taking credit for this one.

  15. When talking about the .com bubble, you can’t overstate the roll of Y2K. It was the high mark of conspiracy theory.

    Yeah, and I *totally* believed it at the time. As I frequently do, etc.

    I didn’t expect to see statist mythologizing on a libertarian site.

    And you are referring to ???

  16. Mises is forbidden here? Nah, he’s mentioned occasionally.
    I’ll boast that I’ve actually read Human Action. And I enjoyed it!
    Got a nice hardcover free for a trial membership to the Conservative Book Club I think. Never bought a single crappy right-wing wackjob book from them but I couldn’t resist the offer.

  17. Brandybuck,

    You cite a general cause of business cycles, but it is not the sole cause. Even with hard currency, the Y2K and dot-com boom would have happened. Even with hard currency, the dot-com bust would have happened.

  18. a market crash where the participants actually paid the price for their bad decisions.

    What a strange and remarkable concept.

  19. Heh, I got my Master’s in IT in Dec 1999, right at the peak of the bubble. I had three offers before commencement and was turning down more interviews, including one with IBM where they wanted to fly me out east.

    A lot of people thought I was crazy at the time for taking the offer from a company dealing in relatively boring ERP embedded database consulting work rather than the web-based stuff which came with stock options and limitless opportunities for growth.

    Well, the ERP firm paid time and a half overtime and that market was pretty steady. I had a six-figure income pretty quickly, and after a few years experience I could consult independently at $100/hr or more, usually working from home.

  20. Got a nice hardcover free for a trial membership to the Conservative Book Club I think.

    Funny, that’s where I got mine too!

    You cite a general cause of business cycles, but it is not the sole cause. Even with hard currency, the Y2K and dot-com boom would have happened. Even with hard currency, the dot-com bust would have happened.

    As near as I can tell from my study of economics, it’s the only cause of business cycles. There will be growth spurts here and there as innovations come onto the market, and some slowdowns as government intervenes in its unwisdom. When you get to an actual cycle of booms followed by busts, it’s because of inflation encouraging malinvestments. Not all inflation is caused by the Fed, we had boom/bust cycle during the gold standard with fractional reserve banking.

    Expansions in the money supply do NOT reach every member of society at the same time. There is no Friedmanite “helicopter drop”. Instead the money hits the banks/lenders first. This cheapens credit, leading to capital expansion that would not otherwise have occured. If you remember the dot.boom, lenders were tripping over each other in their zeal to finance tech startups. But the consumers get the new money last. When the demand doesn’t show up for all the new stuff the expansion is producing (online pet supplies, commercial linux, etc), the bust begins.

    Why didn’t we see inflationary prices? Because there really was a technology market, and it really was innovating. The innovation mostly canceled out the inflation in terms of price levels. But there was overinvestment in technology and underinvestment in what consumers really wanted to purchase.

    Please go read up Mises, or Rothbard or Hayek.

  21. When the demand doesn’t show up for all the new stuff the expansion is producing (online pet supplies, commercial linux, etc), the bust begins.

    Given that people are not yet buying much dog food online, the failure of demand to show up can hardly be blamed on inflation.

    But there was overinvestment in technology and underinvestment in what consumers really wanted to purchase.

    This is completely consistent with the observation that investors did not want to be frozen out of the tech boom. They made a bet on internet companies. Except for Google, Yahoo, eBay, and a few others, they lost.

    Take a look at gold prices. They were dropping in the late nineties as Greenspan was trying to hold back the irrational exuberance by cutting the money supply. I don’t think this boom and bust can be completely or even mostly attributed to excess money.

    Investors make a bet that won’t pay off for two to five years. Other investors follow the “smart” money. The failure of the bet to pay off is not evident until a lot of money has been invested. It is the inherent and unavoidable time lag between the investment and the return that causes the boom and then the bust. Hard money or fiat money makes little difference.

  22. When you get to an actual cycle of booms followed by busts, it’s because of inflation encouraging malinvestments.

    Perhaps I shouldn’t have used the word “cycle”. What I describe as the dot-com boom and bust is not a cycle, nor does it fuel a cycle. It is an event, a bubble. You are correct that the usually poor monetary handling of such events causes cycles. But hard money would not have staunched this event.

    …though it probably would have staunched the housing bubble that followed.

  23. Oh, man. I remember an interview I had with one dot.com company.

    I asked them for a summary of their business plan. Not a written business plan, mind you. Just a quick verbal summing up. All they could say was, “We have a few ideas.”

  24. I take umbrage of your characterization of the technoweenies in Office Space as being loathsome. Yes, they were technoweenies, but lovable technoweenies.

  25. PC Load Letter? What the fuck does that mean?

  26. The crash was the best thing that happened to the software industry, because cleaned out a lot of the crappy developers that were taking up space in our industry and pumping out awful code.

    I remember during the dot.com boom that old-timers here in Silicon Valley would remark on the dramatic increase in assholes in expensive cars on the freeways. After the bust, you could feel a nice California mellow returning.

  27. No, Mises name is fine around here.

    mises.org has had its reputation tainted by its association with Lew Rockwell, who, along with Ron Paul, have been revealed to have been/be adherents to a racist perversion of libertarianism.

    To make it even more confusing, these racist libertarians try to paint themselves as being the only anti-war libertarians, and anyone opposed to them as pro-war pseudo-libertarian cosmos. They do so by cherry picking examples of pro-war statements by the few non-paleo libertarians who have made such statements. They also quote Matt Welch as being pro-war for an emotional comment he made a little while after the 9/11 attacks.

    Just thought I’d sum it all up, so we don’t have to discuss it further.

  28. Didn’t Greenspan orchestrate the whole thing to a significant extent, dropping interest rates to fuel the boom, then tightening up until the bubble collapsed, then easing up in time for the housing bubble?

    I think the new bubble helped pull the economy out of the wreckage of the last bubble, and so we never paid the full price for it. This time, the downturn will probably be longer and nastier (unless we get a brand new bubble…)

    Also, I wanted to give a shout out to David Denby’s book about losing his shirt in the dot-com crash, “American Sucker.” Great book by a guy who was really taken to the cleaners, and doesn’t fall into self pity.

  29. Just thought I’d sum it all up, so we don’t have to discuss it further.

    We could discuss it later. I’m not all that thrilled with Rockwell myself. Will you be at the LP election night pizza party tonight?

  30. I went from people fighting each other to hire me to being unable find any work whatsoever.

    The crash was the best thing that ever happen to me.

    I was glad to see some sanity return to the marketplace. After spending almost an entire career in software development, I was glad to see the 85k per year snot-nosed brats who learned 4 HTML tags (calling themselves…”programmers”) getting laid off. Believe me, they needed the perspective.

  31. We could discuss it later. I’m not all that thrilled with Rockwell myself. Will you be at the LP election night pizza party tonight?

    I can’t make it. I have a class tonight.

  32. Oh, yeah, and let’s hope you get to celebrate the passing of Proposition 98 (eminent domain reform in California).

  33. I can’t make it. I have a class tonight.

    I wrote that too quickly as I was about to run out the door. The more complete story is that I don’t participate in the Libertarian Party any more. I was putting a lot of energy in, and getting a lot of frustration in return.

  34. Mike Laursen has the stench of the Charles Koch hate-machine all over him.
    It was the beltway libs that started this family fuede, ensuring libertarianism will be irrelevant for decades to come.

    It’s billionaire sell-outs and their sycophants that have corrupted libertarianism, not Lew Rockwell and Ron Paul.

  35. How can the logic of one man effect the whole world i.e. Greenspan opened his mouth and .com busted, yet the internet remains extremely important so was he really right.

    It may have been helpfull if he had said something against the housing bubble rather than what he said to encourage it.

    Greenspan was wrong and wrong.

  36. Those that can do it, do it. Those that can’t, teach it. Those that can’t teach, teach teachers.

    You should stick to editing Matt, your writing sucks.

    Jeff

  37. This article was written very vivid, very specific.

  38. Each person in this life, that there is at least a loved one, trying to dream

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