Dot.com bubbles - summary PDF

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Internet and dotcom bubble of late 1990s and 2000 Definition of an economical bubble: (das isch meh für mich (Olivia), sry:) “An economic bubble exists whenever the price of an asset that may be freely exchanged in a wellestablished market first soars then plummets over a sustained period of time at rates that are decoupled from the rate of growth of the income that might reasonably be expected to be realised from owning or holding the asset.” (Source: https://www.businessinsider.com.au/heres-why-thedot-com-bubble-began-and-why-it-popped-2010-12)

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What was the economic situation when the bubble evolved?

In 1993, the release of the Mosaic web browser made access to the World Wide Web possible (prior Internet services like Usenet, Gopher, FTP, etc existed but HTTP was the new invention which triggered this growth). Internet usage increased as a result of the reduction of the " digital divide" and advances in connectivity, uses of the Internet, and computer education. Between 1990 and 1997, the percentage of households in the United States owning computers increased from 15% to 35% as computer ownership progressed from a luxury to a necessity. This marked the shift to the Information Age, an economy based on information technology, and many new companies were founded. ("Issues in labor Statistics". U.S. Department of Labor. 1999.) -> “New economy beschreiben” Taxpayer Relief Act of 1997, which lowered the top marginal capital gains tax in the United States, also made people more willing to make more speculative investments. Telecommunications Act of 1996 was expected to result in many new technologies, and people wanted to profit from them

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NASDAQ composite index increased by 682% (from 751.49 to 5132.52), from January 1995 to March 2000 (source: writepass.com) 1998-99: low interest rate

1994: “American central bank started to rise the rate in order to try to maintain a good balance between the growth in the economy and the risk of inflation” (Govetto & Walcher) (They tried to prevent inflation than to fight against inflation when it had already occured). 1996: “US economy was clearly starting to ‘heat’ “ (Govetto & walcher) => in several sectors of the economy boomed due to excitement of the innovations in technology eg internet. (Govetto & walcher)

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What were the major ideas or illusions that triggered the bubble?

Motto: get big fast, everyone wants to play (writepass.com) “initial start-ups operated with a short-term loss business plan, insisting that by grabbing the market share and dominating their specific sectors they could then charge what they wanted at a later date” (writepass.com) Problem (Source: Money crashers):

most companies had not a business model/plan many investors didn’t analyzed the market properly (study P/E Ration, market trends, reviewing business plan supported ideas that aren’t proven if they have market potential => speculation without substance! lead to “stock-buying mania on Main Street“ https://www.bloomberg.com/opinion/articles/2018-02-06/don-t-forget-what-causes-arecession American publishes (eg Forbes/Wall Street Journal) motivated people to invest in risky companies, even in those, that disregard basic financial & legal principles (writepass.com) low interest rate may “..helped increase the start-up capital amounts & lead to increased venture capital being offered” writepass.com (Metrik 2007) Dot.com bubble is defined as the speculation on the technological shares (Govetto, Marco; Walcher, Thomas)

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How did the bubble start and how did it end?

due to commercial growth of internet, expectation on dot.com companies increased. stock price on internet sector increase rapidly (shareslide 1). This boom led to that stock price was disconnected from the true value of the companies (Govetto&Walcher). => speculations Starting point is difficult to decide. Different interpretations when the bubble started.

business insider australia have a theory with taxpayer relief act. they determined 1997 starting point of dot.com bubble // End of May 2003 ending of bubble because: start point 1: 1997: taxpayer relief act of 1997 TRA97 lowered the maximum tax rate on capital gains for individual investors from 28 per cent to 20 per cent for assets held more than 18 months. Their study showed that: “Taxpayer Relief Act of 1997 left dividend tax rates unchanged – they continued to be taxed at the same rates as regular income in the United States, which provided a powerful incentive for investors to treat the two kinds of stocks very differently, favouring the lowto-no dividend paying stocks over those that paid out more significant dividends.” => bi nid so sicher, ob mer das wänd iehneh…. no gnauer aluege unter: https://www.businessinsider.com/heres-why-the-dot-com-bubble-began-and-why-it-popped-201012

start point 2: 9.8.1995 because of the first sign the “incredible story of the initial public offering of Netscape” (Marco Govetto, Thomas Walcher, Master Thesis, http://studenttheses.cbs.dk/handle/10417/519). Netscape (2 year old company), a company in the software industry, started trading their shares for $28, by the end of the day they had risen to $71 per share. => Internet gold rush was on (Greenspan 2007 => Govetto&Walcher). start point 3: 5.12.1996: Former Chairman of the Fed, Alan Greenspan, hold the famous “irrational exuberance speech”. (That the stock market could have taken speculative directions.) (Govetto & Walcher) start point 4: 1998 => first signs on the market that showed clear signals of “exuberance” (Govetto&Walcher)

end: - Nasdaq sank - Dow Jones Internet Index decreased by 72% - online retailers’ (eg Priceline and eToys) stock prices heavily fallen (around 99%) - talks about recession instead of stock tips - pioneering dot.com business went into insolvency, or hardly survived source: https://www.nytimes.com/2000/12/24/opinion/the-dot-com-bubble-bursts.html

andere source zum gebrauchen: https://www.investopedia.com/terms/d/dotcom-

bubble.asp

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What were the effects on the real economy when the bubble burst?

a lot of companies went bankrupt (Writepass) (Many struggling firms became acquired / merged and many companies changed name (removing dotcom company-assosciation)) -

5 trillion$ lost in stock market (2000-2002) (Shareslide 1)

“Most significant evidence can be dervied from broad market data” (Govetto & Walcher) eg NASDAQ COMPOSITE INDEX (tech heavy index) => January 1998 - March 2000: increase of more than 300% (1500 to 4900 points) => March 2000 - September 2002: fall by 75% of its valu (4900 to 1200) positive effects: (source https://www.quora.com/What-were-the-positive-and-negativeimpacts-of-the-bursting-of-the-dot-com-bubble-on-the-world) - survivors needed to establish sustainable business models - (more) realistic valuation of companies => suitable partners could only purchase company at a reasonable price - timing of the bubble burst => bubble affect the entire economy but burst before USA could grow so large as to risk a large recession => see next group with the

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bubble 2008 high number of bankrupcty however gave place for new smaller and leaner startups Investors got more carefully, at least temporarily. After bursting you (almost always) need a working prototype to get money (procedural change)

negative effects: (same source) - a lot of people lost their work, and not only high-paid coders. May also affect people’s careers, as talented people may taken stable jobs to survive. - many investors lost their money => - due to the bubble burst, it is highly likeable that many technologies were delayed for years or lost completely (hard to specify)

• What was the role of the central bank during the bubble episode (if any)? 1999-2000: US Federal Reserve increased rates 6 times (so economy slowed) (source: prezi)

Source: Govetto & Walcher) Almost more than 4 years of monetary expension (1995-1999) - except March 1997, where they increased the rate but in 1998 reversed it - FED changed their monetary direction and increased the rate in 1999. So, FED implemented a monetary tightening from 1999 - 2001. 2001, FED changed their policy again and “cut the rate at a fast pace” (from 6% to 1.75%) (Govetto & Walcher). In 2004, FED increase the rate again with a steady peace. Interestingly, even the economy flourished in 1996, the FED did not raise the rate for 1 year. “According to the words of Alan Greenspan (2007) this was the case because the Fed was concerned that the data it was given, in particular the one regarding productivity, were not reliable, in the

sense that they were not adjusted to consider the productivity shock that the internet had brought. They thought that given a strong growth in productivity they could have avoided the inflation risk without raising further the fund rate. From his book An age of Turbulence  we understand that the reason Greenspan uses to sustain his choice is that you can t just decide monetary policy based on an econometric model  (Greenspan 2007, p. 164).” (Govetto & Walcher) 1997/98: FED cut interest rate 3times in a row because FED tried to “calm down the general sentiment through a sound easing in its fund rate” due to “rush to liquidity”. (rush to liquidity happened because: 1997: strong crisis in Asian economy (recession of many Asian countries), 1998: Russia’s default => because of those events, the US stock and bond market was hardly hit and therefore banks raised interest rates on commercial loans, LTCM (Long-Term Capital Managment, one of the most respectable investments firms) run into a death spiral, FED bailed them out what caused panic in the market). (Govetto & Walcher) 1999: clear that US stock market is in a bubble, but no reaction from the FOMC (due to Govetto & Walcher: FED believed that “an incremental tightening would not have brought to good results” they rather believed that “it owuld have more likely reinforced the power o f the boom rather than calm it”. (Govett0 & Walcher). However, second half of 1999, FED increased interest rate (=> tightening policy throughout the all 2000), because FED “wanted to ‘take back’ some of the liquidtiy put into the system because of the international tensions of the previous years” (Govetto & Walcher). 2000: Stock market started to descending, FED increased fund rate for the last time (during this period). Assumed, that bubbled burst, as NASDAQ halved its value. (Govetto & Walcher, p.19)

meh details no i dere Masterarbet vo Govetto & Walcher). Falls öpper will, i ha sie im PDF. cha sie schüsch no eu zueschicke. hät sicher no ganz viel interessanti sache deht ine versteckt)

Source not used yet https://www.theneweconomy.com/technology/dotbomb-are-tech-investments-about-todestabilise-the-economy https://www.wired.com/insights/2013/08/tech-boom-2-0-lessons-learned-from-the-dot-comcrash/

https://www.forbes.com/sites/jessecolombo/2018/09/05/disaster-is-inevitable-whenamericas-stock-market-bubble-bursts/#6c86e1661b82

gebrauchte Source: Money crasher: https://www.moneycrashers.com/dot-com-bubble-burst/ Shareslide 1: https://de.slideshare.net/mragab/dotcom-crash Writepass: https://writepass.com/journal/2012/10/2001-dot-com-bubble-its-causes-effect-andlessons-learnt/ Prezi: https://prezi.com/nm313zragtmi/the-dot-com-bubble-revisited/ QUORA: https://www.quora.com/What-were-the-positive-and-negative-impacts-of-thebursting-of-the-dot-com-bubble-on-the-world NY Times: https://www.nytimes.com/2000/12/24/opinion/the-dot-com-bubble-

bursts.html Business insider. https://www.businessinsider.com/heres-why-the-dot-com-bubble-beganand-why-it-popped-2010-12 Govetto, Marco; Walcher, Thomas: http://studenttheses.cbs.dk/handle/10417/519...