Explaining the "dot-cons"

At some point, all revolutions pass from the raised fists of the revolutionaries into the more sober hands of historians. The dot-com era is no exception.

It wasn't so long ago that many Americans believed that the Internet was the engine behind a new world of peace and prosperity. And yet that period already seems almost ancient, says John Cassidy, author of "Dot.con: The Greatest Story Ever Sold," published in February by HarperCollins.

Cassidy's chronicle of the "carefree 1990s" presents a lively account of a period when "the restrictive laws of economics and gravity had been temporarily suspended." The book recounts how investors and technology companies got caught in a speculative bubble, very much like the Dutch trafficking in tulip bulbs in the 17th century, as well as the early 19th century American craze for railroads.

A bubble, Cassidy writes, occurs when "the price of an asset--a stock, a house, a gold ring, or any other item of value--rises beyond anything that can be justified on economic grounds, and then keeps on rising for an extended period."

Cassidy, a staff writer for The New Yorker, recently talked with CNET News.com about the New Economy and the intellectual and psychological currents that marked its rise and subsequent fall.

Q: In reading the book, I was reminded of the scene at the end of the movie "The Right Stuff," when the Chuck Yeager character rides his jet higher and higher into the stratosphere and eventually starts to slip from Earth's gravitational pull, and is almost floating--and then of course he plummets back to Earth and the plane crashes. Do you think that's a fair description of the dot-com era?
A: Yeah, I guess we did depart from reality for a while there, sure. All speculative bubbles go through three or four phases, and the penultimate one is the free-soaring one where reality and gravity and common sense...seem to not matter very much any more. But, unfortunately, the next stage in the boom is always the bust.

"A speculative bubble is a combination of greed, human fallibility and jealousy."

You preface the book with a quote from Sex Pistols singer Johnny Rotten: "Ever get the feeling you've been cheated?" And the title of the book suggests that the dot-com era could be summed up in one word: "swindle."
I think that's a bit strong. The title is partly meant to be ironic--it's partly an attempt to be amusing--but there is a serious message there. When I say it was a con, I guess I'm basically saying there was a lot of deception going on, and I think there were two types of deception. One, there was sort of active deception by Wall Street. I think they were deceiving people about long-term prospects about these (dot-com and technology) stocks. But also there was a lot of self-deception going on. Investors wanted to believe this stuff, and in a sense they conned themselves into believing a lot of the stuff which Wall Street was peddling.

The evidence of risk was there all along, as your book points out, in things like the prospectus for @Home, which told investors that "there can be no assurance that the company will ever achieve prosperity." So why didn't investors heed those warnings?
Investors never heed warnings during a speculative mania. The urge to make money quickly overcomes caution; that's the essence of a speculative bubble. In the early stages of the bubble, people do pay heed to warnings, but then the people who've missed out start to feel stupid. There's a lot of jealousy. A speculative bubble is a combination of greed, human fallibility and jealousy. The people who haven't gotten in at the beginning feel jealous of the people who have, and that leads to copying, and the essence of a bubble is (that) people stop thinking for themselves and start following the herd.

(During) the euphoric stage of the boom, between 1998 and 2000, people basically dispensed with warnings...The book goes through that in detail about a lot of people like George Soros and Warren Buffet, who were warning that there was a stock-market bubble. They were discredited and they were seen as too old-fashioned to understand what was happening, and that's all part of the self-fulfilling process involved in a speculative bubble, whereby caution and common sense go out the window.

What about the role of Federal Reserve Chairman Alan Greenspan? You talk about him a lot, and it seems like a fair amount of blame could be laid at his feet.
Greenspan deserves some credit--maybe a lot of credit--for the sort of general prosperity...in the last 15 to 20 years, but I think during the Internet bubble, he made some policy mistakes. One of the roles of the Federal Reserve--and one of the reasons it was set up--was to prevent exactly this sort of speculative mania. The Fed was set up in 1913 after the...crash of 1907, and the whole point of it was to keep Wall Street in its place.

Greenspan did play a role, (but)...no one person was to blame. The whole point of a speculative bubble, the whole point of the book, is to point out how the various players involved--Wall Street, Silicon Valley, the media, the Federal Reserve Board and the American public--sort of conspired together to produce this speculative bubble. And I think each of the parts of the story is just as important as the other one.

It also seems to be a very American story. You talk about the Nasdaq being a sort of metaphor for American triumph after the end of the Cold War and things like that.
I'm not meaning to suggest that only Americans are gullible enough or greedy enough to buy Internet stocks. Clearly that's not the case. There were Internet stock bubbles, albeit smaller ones, in London, Paris, Frankfurt and Tokyo, so investors all over the world showed that they were willing to buy Internet stocks in the hope of making gains. But I think more broadly the whole Internet phenomenon--and the stock bubble was only a part--couldn't have gotten as far as it did unless it had been tied to deep-rooted forces in American history.

"It was the stock market driving a lot of these deals, not the underlying technology or the underlying business logic."

The technology was American, for one thing. Second, the whole idea of the Internet, the optimism involved, the sort of boundless future that it represented, I think...was something which appealed to American values and history. It did seem for a while that the Internet represented America's future.

And then there are, of course, the historical precedents: tulip mania, the South Seas bubble.
Yeah, we've had lots of speculative bubbles. What sets this one apart is its scale, I think. This was the biggest speculative bubble America's ever seen. There was a big speculative bubble in the 1920s, but not nearly so many people were as involved as in the 1990s.

So how much did it end up costing? Is there any way to really calculate that?
No, not really...It depends which companies you include and which ones you don't, and whether you just include Internet companies, whether you include technology companies, whether you include the Nasdaq more generally. I think there's one figure floating around (about) the Nasdaq: Between March 2000 when it peaked and April 2001, a year after it crashed, about $4 (trillion) or $5 trillion was wiped from the American stock market. That's probably a reasonable estimate of how much was involved.

Is technology fated to this particular pattern of boom and bust? You mention precedents such as railroads and radio.
You need something exciting. One of the reasons speculative bubbles start is because people get excited about the object of speculation. And people often get excited about technology. In the 1920s, I think I pointed out, radio was seen as the Internet of its day--it was a very similar media tool in some ways; it seemed to sort of overcome distance, it seemed to bring people together, it came into people's homes. So radio stocks were the sort of Internet stocks of the 1920s--RCA being the classic one, Radio Company of America, which went I think from about $1 to $475 between 1921 and 1929.

How much did technology actually contribute to the economy overall and to productivity in particular?
Well, that's a big debate...It certainly was a significant factor. There have been various calculations done which suggest that about a third of all the growth in the economy between, like, 1995 and 2000 was technology-related, and more than a third...of all the productivity growth was technology-related. So certainly technology was a big part of the story of the American economy in the late '90s, there's no disputing that.

So have we seen the last of the likes of Pets.com and Webvan?
We've certainly seen the last of Pets.com and Webvan. I don't think anybody's going to resurrect them. I think the golden age of the great Internet retail start-up is definitely gone. I don't think you could raise money today for an Internet retail venture. They were largely a product of the stock market, not a product of the technology. That's what I try to make clear in the book, that it was the stock market driving a lot of these deals, not the underlying technology or the underlying business logic. People were basically putting companies together as the back end of stocks rather than vice versa. And I think that's gone, sure.

There are some survivors that came out of the era. You point to eBay and Travelocity.com.
The book is not an attempt to say that you can't make money on the Internet; it's just an attempt to say that it's very difficult to make money on the Internet. I mean, the Internet is such a big, all-embracing technology that some people will certainly end up making money on it, and some people already are. eBay is a classic example...eBay is a company that exploits the Internet in a unique way; it allows you to do something you could never do before. And it's a truly virtual company. They don't get involved in the shipping or anything, or the packing...There's not many companies that can sustain 90 percent profit margins.

So has sanity finally prevailed with tech stocks, or is it just a case of exhaustion?
Well, it wasn't sheer exhaustion, it was a bust, you know--you get panic. That's always the end of a bubble. Because a lot of it is just wishful thinking, and when the prices start to fall, people realize that and they realize the game's up and everybody tries to get out at the same time. You get panic selling. And that's what has happened. You also get a sort of great hangover when people start to realize that a lot of the apparent growth that took place during the bubble was actually an artifact of the bubble itself, and that's what has happened in this case in technology.

A lot of the technology spending that was going on...was driven by the stock boom itself. I mean, the biggest buyers were the new companies that were raising money on Wall Street; the biggest technology buyers were the new telecommunications companies, which were...created during the bubble. So when the bubble collapsed and these guys couldn't raise any money, the orders in the technology sector collapsed, and companies like Lucent (Technologies) and Nortel Networks found out that what they thought was real growth actually wasn't growth at all. Their orders collapsed, and that's why you had such a depression in the technology sector.

So what do we walk away from the dot-com era with? What lasting tools or sensibilities?
Well, we walk away with the Internet itself, which is an amazing piece of technology. I mean, in one sense, I guess you could look at it all as an exercise in corporate philanthropy--inadvertent corporate philanthropy, inadvertent Wall Street philanthropy. They did build out the Internet, these companies. So we've got the actual technology itself now widely distributed. You have vast amounts of information. So I think that's one product of it--the Internet itself. Second, as always when a speculative bubble bursts, we've relearned a few lessons about financial common sense and greed and gullibility.