Two years ago this week, a rumbling on Wall Street grew too loud to ignore.
It was the sound of confidence cracking.
The following week, the tech-heavy Nasdaq index registered its biggest percentage drop ever, plummeting more than 25 percent during five days of panic selling.
The worst was yet to come.
We talk about what happened as the bursting of a bubble, a handy metaphor for the abrupt end of something frothy and ephemeral. But the phrase doesn’t begin to describe the unpleasant aftermath.
A burst bubble suggests a big wet pop, a harmless splatter.
For many, the April 2000 stock shock was more like a quake, a massive shift along a major fault line.
Over the next 18 months, trillions of dollars tumbled into the chasm. Thousands of businesses shut down and millions lost their jobs.
The tech sector tumbled into a depression by most measures, its worst slump in at least 30 years.
It still hasn’t recovered, though the rest of the economy shows signs of shrugging off a mild recession.
We assure ourselves that we learned from the market mania. Chief among the platitudes in our body of wisdom is a revamped Web mantra: The Internet is a business tool, not a new frontier for limitless growth.
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Since the bubble’s bursting, we’ve found no shortage of villains. We’ve fingered greed-driven stock peddlers who used the IPO market as a piggy bank. We blamed opportunistic dot-comers, day-traders and the media.
More recently, we added accountants and execs whose financial gimmickry made it appear big companies were growing as fast as any dot-com.
Two years after the big pop we’re poorer but wiser. We’ve done our penance. We’ve cleaned up our act.
We’ve exchanged our dot-com dreams for old-fashioned business fundamentals, for profits revealed in perfectly transparent financial statements.
We’re clear about what got us into trouble, right? Not really.
There’s still a deep divide between those who embrace the idea that Internet technology ushers in a more prosperous era of faster economic growth and those who say that any productivity gains during the 1990s boom were, at best, ephemeral.
Then there’s the troubling matter of bubble-ology.
Economists of varying stripes have difficulty with the notion that investors suddenly take leave of their senses.
At the University of Chicago’s Graduate School of Business, on a campus renowned for its Nobel Prize-winning economists, professor Anil Kashyap recalls his colleagues’ banter about market theory in the faculty lounge.
If we agree that markets are efficient over long periods, how do you know when they’ve gone bonkers?
“It’s tempting to say, `This is crazy,'” Kashyap says, “but then why don’t you think everything is crazy all the time? Defending the idea that you can spot [market anomalies] has proven to be a terrible way to run your portfolio.”
Kashyap had no trouble resolving the matter in his own portfolio. He shorted Amazon’s stock.
New Yorker writer John Cassidy, author of “Dot.con: The Greatest Story Ever Sold,” includes Fed Chairman Alan Greenspan on his list of culprits. He faults Greenspan for not raising interest rates early enough to curb the market’s manic run-up.
At the other end of the political and ideological spectrum is Brian Wesbury, chief economist at Griffin, Kubik, Stephens and Thompson in Chicago, who blames Greenspan’s rate hikes–the hikes that Cassidy and others say came too late–for triggering the recession.
“I’m not a big believer in `bubbles,'” Wesbury says.
“We go through these phases in human history where people make choices. Are you going to be an adventurer who’s optimistic about the future? Or are you going to say, `This is too good to be true?'”
As for the Internet’s promise, “We’re just tapping its potential.”
When was the last time you heard that kind of talk? Probably not since April 2000.
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