Dot-Com Bubble

In January 1995, the NASDAQ was at the 750 level. On March 10, 2000, the market peaked at 5,132, an increase of 584% in 5 years.

In a 1996 speech, Greenspan warned that the US economy was suffering from “irrational exuberance.” The following day, the stock market dropped significantly. Mr. Greenspan never used the term again.

As the economy heated up in the late 1990s and Wall Street started pushing IPOs like Pets.com -- many of which soared by 500% to 1000% on the day they were issued -- Greenspan didn’t take away the punch bowl before the party got out of hand, as he should have done. If he’d increased margin requirements, or interest rates, day traders wouldn’t have had the money to propel the markets to such ridiculous heights.

As the year 2000 approached -- along with ridiculous fears of the “Y2K crash” --Greenspan flooded the economy with cash, which immediately flowed into dot-com stocks and pushed the NASDAQ to its epic peak, a level that won’t be seen again for decades.

The technology-heavy NASDAQ Composite index peaked at 5,048 in March 2000, reflecting the high point of the dot-com bubble.

Robert Shiller, professor at Yale, published Irrational Exuberance in early 2000. The book poked holes in Wall Street’s rationale for stocks being as high as they were, arguing that a complete disconnect had occurred between earnings and the level of the stock market.

Shiller argued that “positive feedback loops” among investors led to herd-like behavior and created a “naturally occurring Ponzi process; furthermore, this feedback loop was based on the “indifferent thinking, emotions, random attentions and perceptions of conventional wisdom" of millions of people. In short, he effectively concluded that the “efficient market theory” was a load of crap.

In the real world, people aren’t rational machines. You can’t model human behavior - very disappointing for academics and “scientists” at investment banks.

All previous speculative peaks in 1901, 1929, and 1966 resulted in subpar stock returns for 2 decades thereafter. The peak reached in March 2000 far exceeded any in history, as millions of people piled into the stock market. A sort of collective delusion overcame the country.

The dot-com crash wiped out $5 trillion in market value of technology companies from March 2000 to October 2002. Communications companies, overburdened by massive amounts of debt, filed for bankruptcy.

WorldCom, run by Bernie Ebbers, was found to have used illegal accounting practices to overstate its profits by billions of dollars. The company's stock crashed when these irregularities were revealed, and within days it filed the largest corporate bankruptcy in U.S. history. Ebbers went to prison. Wall Street “analysts” were discredited; some were prosecuted for touting worthless stocks as buys.

The trigger for the collapse were Greenspan’s 6 interest-rate increases, culminating in a rate of 6% by late 2000. The collapse of the internet bubble, the resulting reduction in business activity and the increase in interest rates combined to push the country into recession. Alan Greenspan and George W. Bush have one thing in common: They don’t believe in recessions. Greenspan rapidly decreased the Fed discount rate from 6% to 3.5% by September 2001.