Crash Nº 9 · 1995–2002
The Dot-Com Bubble
The internet was real; the business models were optional
−78% NASDAQ Composite, March 2000 to October 2002
The Setup
The displacement was the browser. When Netscape went public in August 1995 — eighteen months old, profitless, and up 108% by lunch — it demonstrated two things at once: the internet would change everything, and you could be paid today for a change that would take a decade. Both were true. That is what made the next five years so expensive.
The financing machine was equity, not bank debt — venture funds, an IPO window that never seemed to close, and a public happy to day-trade the future on new online brokerage accounts.
By 1999 the metrics had detached from money entirely: eyeballs, click-throughs, “mindshare.” Companies IPO’d on a promise to lose money faster than their rivals, and the losses — spent on Super Bowl ads and leased fiber — became someone else’s revenue growth.
Displacement, 1995–96
Netscape, Yahoo, Amazon: the pioneers are genuine, the technology is genuine, and the early prices are merely optimistic. Greenspan wonders aloud about “irrational exuberance” in December 1996 — three years and 3,500 NASDAQ points early.
Boom, 1997–98
Every setback is bought: the Asian crisis, then LTCM in 1998 — and the Fed’s three rescue cuts after LTCM pour fuel straight into the one market that didn’t need help.
Euphoria, 1999 – March 2000
The NASDAQ rises 86% in 1999 alone. Pets.com, eToys, Webvan; analysts price “price-to-eyeballs”; Y2K liquidity gives one last shove. On March 10, 2000 the index closes at 5,048 — five times its level four years earlier.
Distress, spring–autumn 2000
No single Black Thursday — the IPO window just closes. Barron’s counts the burn rates; companies six months from empty find no buyer of last resort. The dot-coms die quietly, alphabetically.
Panic, 2001–02
The bust climbs the food chain: telecoms that borrowed real money for dark fiber, then the frauds the tide exposes — Enron in 2001, WorldCom in 2002, the largest bankruptcy in US history. The index bottoms at 1,114, −78% from the top.
The Reckoning
Five trillion dollars vanished and the banking system barely noticed — the book’s cleanest demonstration that what turns a crash into a catastrophe is not the size of the losses but who was leveraged against them. An equity bubble bursts on its investors; a credit bubble bursts on everyone. The Fed’s easy money after this crash flowed into housing, where the distinction would be demonstrated the expensive way.
What it cost
The bubble was financed with equity rather than credit, and the difference shows in who paid. There was no foreclosure wave and no loss of deposits; the paper losses stayed with the people who had bought the shares. US unemployment rose from 4.0% in 2000 to 6.0% in 2003, on the Bureau of Labor Statistics figures tabulated in the Economic Report of the President — mild beside every credit bust on this site. The exception was telecoms.
- 4.0% → 6.0% US unemployment rate, annual averages for 2000 and 2003; the number of unemployed went from 5.7 million to 8.8 million Economic Report of the President 2013, Table B-35, Civilian population and labor force, on Bureau of Labor Statistics data
- −337,000 telecommunications jobs below the March 2001 peak by the end of 2005; the industry shed 25.3% of its employees, and wired carriers finished 2005 below their 1995 level Christopher C. Carbone, Cutting the cord: telecommunications employment shifts toward wireless, Monthly Labor Review, Bureau of Labor Statistics, July 2006
- 649,000 → 1,936,000 people in the US unemployed for 27 weeks or more, annual averages for 2000 and 2003; the median spell of unemployment lengthened from 5.9 weeks to 10.1 Economic Report of the President 2013, Table B-44, Unemployment by duration and reason, on Bureau of Labor Statistics data
On 26 June 2003 the US Department of Labor sued Enron, its board of directors, Kenneth Lay and Jeffrey Skilling over the company’s 401(k) and employee stock ownership plans. The suit alleged that they had failed to consider the prudence of Enron stock as an investment for the retirement plans and did nothing to protect the workers and retirees from extensive losses, and that Lay had encouraged employees to buy the stock while misrepresenting the company’s financial condition. The directors, officers and committee members later paid $86.85 million, and the plans were given a $356.25 million unsecured claim in the bankruptcy.
What followed
The response was legal rather than political. The Sarbanes-Oxley Act became law on 30 July 2002, written to protect investors by improving the accuracy and reliability of corporate disclosures. Bernard Ebbers of WorldCom was sentenced to 25 years on 13 July 2005. A Houston jury convicted Jeffrey Skilling on nineteen counts in May 2006; he was sentenced to 292 months, resentenced to 168 after the Fifth Circuit vacated the first sentence, and forfeited about $42 million towards restitution for Enron’s victims. No government fell.
Public Law 107-204, the Sarbanes-Oxley Act of 2002, on govinfo; US Department of Justice, Southern District of New York, United States v. Bernard Ebbers; US Department of Justice, Criminal Division, United States v. Jeffrey K. Skilling