Business | Technology
Dotcom bubble's crash paved way for credit crisis
It led to low interest rates for housing
- By John Authers and Michael Mackenzie, Financial Times
- Published: 00:00 March 13, 2010
New York: In January 2000, 17 dotcom companies paid more than $2 million (Dh7.34 million) each to advertise during the Super Bowl, the season-ending national championship game for American football.
For anyone looking for the symbolic moment when an investment bubble led to excesses that were plainly unsustainable, that was it. Just a few weeks later, on March 10, the barometer of dotcom mania or what was the technology and telecom bull market of the 1990s the Nasdaq Composite, closed at a high of 5,048.62.
That completed the Nasdaq's stunning rise from just 750 at the start of 1995, a gain of 570 per cent. Once it started to crash, it did not stop until it hit 1,114.11 in October 2002 — a drop of almost 80 per cent from its peak. Even today, exactly 10 years after its high, the Nasdaq sits at about 2,340, some 54 per cent from its greatest moment.
This was a bubble as insane as any in history. "It was a time when the rules of investing made no sense and as much as people liked to think things had changed with all the talk of a new industrial revolution, it was shown they do not," said Anthony Conroy, head of trading at BNY ConvergEx.
The mania was apparent in the run-up to the Nasdaq collapse, when individuals gave up steady jobs to become "day traders" in the hope of making fortunes from soaring shares. That particular road to riches came to an abrupt halt and the role of individual traders in the stock market has been much more marginal ever since.
The bursting of the bubble had a huge impact on the business of financing technology start-ups. But it went much further than that. Arguably, the dotcom boom ushered in the historically low interest rates from the Federal Reserve that are now widely blamed for allowing the housing and credit bubbles. It also paved the way for lightly regulated hedge funds to succeed mainstream mutual funds as the critical drivers of the market.
Severe losses
The bubble itself was largely driven by what the former Fed chairman Alan Greenspan called "irrational exuberance" — increasing investment by retail investors in stocks, either through mutual funds or through fledgling internet brokerages. Many of these investors, egged on by widespread television advertising, only entered near the top of the market and suffered severe losses. This dented the market influence of mutual fund managers.
"I don't think we have ever seen such a point when so many people from Main Street were involved in the market to that degree," says James Paulsen, chief investment officer of Wells Capital.
The Nasdaq crash coincided with a drop in the broader US stock market, but it was relatively localised. Outside technology, media and telecommunications, stock valuations were high but not extreme. Given the scale of the crash, it was therefore surprisingly easy to avoid losing money.
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