It seems to have followed a very similar sequence of events as the housing bubble and the collapse of the subprime market. But this was during the Clinton years, before the "deregulation" and "trickle down economics" imposed by the Republicans during the Bush years. If the current recession was caused by the free market, as most people now believe, how did the same thing happen during the period of enlightened liberal leadership and economic controls?
Almost everything that has gone wrong in America can be blamed on the following people:
1. Woodrow Wilson (D) - Federal Reserve, entry into WWI for no good reason. No Fed Reserve, no WWI = No Depression, no Nazis/fascists, no WWII. No FDR or LBJ for that matter.
2. FDR (D) - New Deal.
3. LBJ (D) - Great Society, Vietnam.
'98 LTCM/Russia default -> rates cut -> liquidity is flying.
Stock cannot be used as collateral for a banking position. So the multiplier to the bubble is 1x. The most people and banks can lose is the value of the stock.
'02-'03 fear of deflation leads the Fed to keep rates low for too long. This time the money hose is directed at property, and the loans are used as collateral for CDOs. A security w/ AAA rating requires 0.56% cash deposit aka "haircut". So the increase of the securitised market by $5-8trn 2003-2007, and say 10-15% is AAA -> ~$800bn in highly rated collateral, which can be used to back $800bn/0.0056 in loans. Obviously not all of the collateral was used to back loans, but a significant amount was.
The haircut on BB paper? 53% or 100x. So paper that was considered sterling now needed 100x the cash to back it (or more), and $14trn in assets were quickly destroyed.
Other than a boom followed by a bust it wasn't similar at all. It also had a fraction of the impact of the financial system collapse. Also, your historical references were incorrect. Deregulation and trickle-down economics were from the Reagan years, right BEFORE Clinton.
The dot.com boom/bust was caused by speculative investors (who are mostly conservatives, the dumbest people on the planet) believing that the "new economy" meant old economic principles didn't apply. Any swinging dick with .com in the company name was getting millions in venture capital without even a business plan or working product because heck, this was the "new economy". This flood of money attracted criminals masquerading as businessmen (more conservatives). After several years it started to dawn on people (again, since they were mostly conservatives they were slow to catch on) that maybe they should expect some profits at some point. Like a bunch of nervous sheep investors scattered in early 2000 triggering program trading that caused massive drops in the tech-heavy NASDAQ.
After the precipitous fall smart people (liberals) cleaned up the mess and implemented limits in program trading and disclosure (regulations) to protect stupid people(conservatives) from themselves.
Irrational exuberance.
Answering the question in the subject line:
Greed.
another dumbass MBA student in need of the answer to the homework of the week.
There was no late 90s crash. It began several months into 2000.
You're such a douche Keith.
Hey, those "smart" Liberals did a great job recognizing the mortgage collapse:
http://www.youtube.com/watch?v=iW5qKYfqALE&feature=related
(Actually listen to what he says. It's UNFRIGGINBELIEVABLE.)
The bubble began back in the mid-late 90s. I don't think he was implying that the crash was a 4 year crash.
That's what bubbles do. Otherwise they are not bubbles.
A few points:
A) It is convenient (and ideological) to argue that the free market caused the housing bubble, but in reality, the US residential real estate market in no way resembles a free market. It is subsidized six ways to Sunday to further social goals, which which was a major factor in driving median house prices away from their historical valuation of about 3 times median income. Up until the mid / late 90s, this ratio had been steady as a rock and it began creeping up as the US stock market bubble inflated and eventually got over 5 before the bubble burst. Latest data: median house price 174k, median income 50.2k (2007). Ratio 3.5x Real estate is still overvalued by 15.5%. The pain is not over yet in the real estate market. If you want to get a flavor of the social engineering involved in the US real estate market, google the following: "American Dream Commitment Fannie Mae Raines" and read how Fannie Mae did an end-around their charter and helped create the subprime market. In the process they became the biggest mortgage hedge fund on the Street. Add to the mix the most reckless Federal Reserve Chairman in history (Greenspan) and bull market psychology and you have the US real estate bubble.
B) The tech bubble was a function of easy money and new era thinking and is a common phenomenon in markets. Stock bubbles in the US happen every so often (radio stocks in the 20s, electronics stocks in the 60s, the nifty fifty in the 70s, oil and gold in the 80s, etc etc) Stock bubbles have been around forever and have nothing to do with deregulation or trickle down economics.
C) Keith Stone - you are a tool. Go pour yourself a nice cup of tea and watch old videos of Keith Olbermann calling Rush and Glen the worst person in the world.
A1: The Telecommunications Act of 1996.
This is probably the most often ignored part of the bubble in my opinion. Deregulation of local phone service opened up the monopolies to outside competition (which was actually a good thing). Capital flowed into new regional bell operating companies (RBOCs) who over-built fiber optic networks. This fueled the idea that internet commerce was the "wave of the future," and it was only a matter of time before all traditional bricks and mortar business would close. In some sense, the market actually got the story right, but its mistake was assuming that the monumental change would come much quicker than reality.
The dot-com bubble was actually more of a tech, telecom, and media bubble. Most other sectors of the economy were not really impacted all that much. In fact, by the end of 1999, the technology and telecom sectors alone comprised 50% of the combined weight of the S&P 500 index. Today, those sectors are only around 20% of the index.
A2: Corporate abandonment of defined-benefit pension plans in favor of 401(k) plans.
The 401(k) was first available in 1981, and by the early 1990s, companies started to adopt this new retirement program on a broad scale, and in the process, they quickly began to abandon their old defined-benefit pension plans. Thus, the burden of retirement investing shifted from the company, to individual investors. For many households, this was the first time they had thought about the stock market, which became more popular thanks to accessible business media such as CNBC. According to the Investment Company Institute, in 1980, only 5% of households owned an equity mutual fund. By 1990, this figure was 25%, and by 2000, it reached over 50%. So US equity markets saw a massive inflow of capital, which lowered the cost of capital and made it possible for many marginal tech/telecom companies to go public.
Technology also lowered transaction costs associated with equity trading, and discount brokers became more accessible to the average investor. Online brokers began to show up in the mid-1990s, which turned equity investing into a video game. As the markets rose, day traders proliferated. By the end of the "bubble" many institutional and individual investors were investing on fear. Fear that they would not be in the market, and it would continue to rise.
Bubbles are actually very common in markets throughout history, so the dot-com era was nothing new. The severity of the correction was certainly larger, but there are many examples of similar bubbles in different industries: tulip bulbs in the late 1600s, Railroads in the late 1800s, autos in the early 1900s, oil drilling in the 1970s, LBOs in the 1980s, tech/telecom/media in the late 1990s, real estate in the 2000s, gold currently.
sold2u wrote:
C) Keith Stone - you are a tool. Go pour yourself a nice cup of tea and watch old videos of Keith Olbermann calling Rush and Glen the worst person in the world.
Why stay up late to watch Olbermann when I can see examples of how stupid conservatives are right here any time I want? A man's gotta be efficient with his time, it's what the smart people do.
Why stay up late to watch Olbermann when I can see examples of how stupid conservatives are right here any time I want? A man's gotta be efficient with his time, it's what the smart people do.
1. Olbermann is a liberal.
2. The idiots of the dot com bubble weren't those "conservative" investors. In the late 90's, with the rise of the Internet, computer programming seemed like the new sexy job that anyone could do, so every Joe who wanted to get rich quick tried to start a consulting company and be a programmer, not knowing that you need to be _smart_ and _good with computers_ to do those jobs. Most of those companies failed miserably, and the fad died, but many investors still won overall in the end thanks to the few, bigger companies that got big.
the Rock wrote:
You're such a douche Keith.
Hey, those "smart" Liberals did a great job recognizing the mortgage collapse:
http://www.youtube.com/watch?v=iW5qKYfqALE&feature=related(Actually listen to what he says. It's UNFRIGGINBELIEVABLE.)
Krugman, among other liberals, was saying for years that the housing market was in a bubble and that it would crash with disastrous results. The Internet bubble was of little significance by comparison, a blip.
Krugman and other liberal "talkers", perhaps. It's their job to always find things wrong and make themselves appear to have everything figured out, though they're afraid of taking a real job because that involves responsibility.
Now, to jobs with actually responsibility, like those of Barney Frank, who was on the INSIDE of the whole thing.....well.....that video I posted serves as anough evidence of either: a) his head is waaay up his @ss (which he's into I'm sure), or b) he was involved, knew the situation, and is now lying to the American public.
jjjjjjjjjjj wrote:
Krugman, among other liberals, was saying for years that the housing market was in a bubble and that it would crash with disastrous results. The Internet bubble was of little significance by comparison, a blip.
Peter Schiff, among other CAPITALISTS, was saying for years that the housing market was in a bubble and that it would crash with disastrous results. He also recognized the relationship between the internet bubble and the housing bubble, pointing out that the latter started inflating when the former burst. Under Alan Greenspan, the Federal Reserve pallated the collapse of the internet bubble by lowering interest rates and making easy credit availible which spilled into the housing market, creating the housing bubble. Meanwhile, liberals like Krugman totally ignored the obvious role of the central bank in creating the bubbles, and instead used the crises as an opporunity to promote his social agenda. He, like all liberals, will go down in history as one of the 20th century pseudointellectuals who contributed to the collapse of America.
jjjjjjjjjjj wrote:
Krugman, among other liberals, was saying for years that the housing market was in a bubble and that it would crash with disastrous results. The Internet bubble was of little significance by comparison, a blip.
Dude, everyone and his dog knew that the housing market was in a bubble and would eventually collapse. In 2005, I had absolutely nothing in the way of political opinions and had never voted in my life, but had the sense not to puruse a real estate career at the time because I knew that the market was in a bubble. It's positively laughable to say that liberals were the ones who possessed this great knowledge of what was really happening, as if it was some big secret accessible only to the intellectual elite. Even the politically apathetic knew it.