Monetary and Fiscal Policies During the Dot Com Bubble.pdf
1. What is the Dot-com Bubble?
The dot-com bubble refers to a period of excessive speculation and inflated
valuations of internet-based companies, also known as the dot-coms, in the
late 1990s and early 2000s.
During this time, there was a rapid growth of internet-related technologies, and
investors were highly optimistic about the potential of these companies.
As a result, there was a significant increase in the number of internet startups and a
surge in their stock prices.
2. Emergence of the internet and related
technologies.
Creation of new business opportunities and
growth potential.
Technological advancements and the rise
of the internet:
1.
2.
Overly optimistic expectations about internet
companies' potential.
Belief that traditional valuation metrics did
not apply to dot-coms.
Investor optimism and irrational exuberance:
1.
2.
Influx of venture capital funding into internet
startups.
Surge in initial public offerings (IPOs) of
internet companies.
Venture capital and IPO frenzy:
1.
2.
Factors Contributing
to the Dot-com Bubble
Many dot-com companies had little or no profits.
Stock prices driven by future growth expectations
rather than present financial performance
Lack of profitability and unsustainable business
models:
1.
2.
3. Stock market
performance during
the bubble's rise:
Companies and
sectors heavily
affected:
Bursting of the
bubble and its
aftermath:
Sharp increase in stock
prices of these
companies.
Dot-com companies
becoming the darlings
of Wall Street.
The number of Internet-
based companies across
various sectors was growing
rapidly . Hence, their future
was threatened.
Examples: Pets.com,
Webvan, and many others.
Stock market crash and
significant decline in
dot-com company
valuations.
Bankruptcies and
closures of numerous
dot-com companies.
As a result, there was substantial investor losses and economic repercussions!
Dot-com Bubble: Rise and Fall
4. Timeline
Late 1990s
The dot-com bubble begins as
the internet gains popularity
and investors recognize its
potential for growth.
1999-2000
The bubble reaches its peak because
investor optimism soars and stock
prices of internet companies
skyrocket. IPOs of dot-com companies
attract significant attention and
funding.
March 2000
NASDAQ Composite Index hits
its highest point, signaling the
climax of the bubble.
April 2000
The bubble starts to burst as
investors grow skeptical of the
excessive valuations and lack of
profitability in many dot-com
companies. Stock prices begin to
decline.
2001-2002
Dot-com companies face financial
challenges, with many struggling to
generate profits. Bankruptcies and
closures become widespread.
5. Monetary and Fiscal Policies
Investors' errors were insufficient alone to
create the bubble
Alan Greenspan was the Chairman of the
Federal Reserve during that time
Some blame Greespan for his reckless
monetary policies
Alan Greenspan
Chairman of the Federal Reserve from 1987 to 2006
6. Monetary and Fiscal Policies
1997-1998: The Fed implemented a series
of interest rate cuts in response to the
Asian Fiancial crisis
1998-1999: The Fed adjusted its open
market operations to support the booming
economy
Fall of 1999: The Fed mistakenly created too
much money in response to the Y2K bug
Late 1990s: The US govt pursued
expansionary fiscal policies to support the
economic growth
Tax revenues were bolstered by the
booming stock market
7. To Kill the Patient to Cure the Disease
In late 1999, the Fed began to express
concern about the bubble and began
adjusting its open market operations.
Now they thought that the only way they
had to stop the speculation was a strong
monetary intervention
Greenspan later defined it as to kill to
paitent to cure the disease
Now the Fed gradually started to increase
the funds rate from 4.75% in June 1999 to
6.5% in May 2000.
When the bubble was reaching its peak,
the U.S. government began to take a
cautious stance.
8. The Fed increased the funds rate from 4.75% in June 1999 to 6.5% in May
2000.
To Kill the Patient to Cure the Disease
9. Monetary and Fiscal Policies
The Fed’s intention was now to cool down
the economy.
The Fed embarked on an aggressive series
of interest rate cuts again in 2001.
The fed funds rate was lowered from 6.5%
in January 2001 to 1.75% by December 2001.
This was aimed to stimulate economic
activity, boost consumer spending, and
restore investor confidence.
In 2002, the Fed reduced the funds rate to
historically low levels.
In mid 2000, the government shifted its
fiscal policy focus again.
In 2001, President Bush proposed and
signed the Economic Growth and Tax Relief
Reconciliation Act.
Bush’s tax relief was intended to boost
consumer spending and business
investment.
The government implemented fiscal
stimulus measures including increased
government spending on various fronts
aimed at stimulating economic activity and
employment.
10. The fed funds rate was lowered from 6.5% in January 2001 to 1.75% by
December 2001.
22. Blanchard, O. (2020). MACROECONOMICS, GLOBAL EDITION.
Clarke, T. (2015, June 12). The Dot-Com Crash of 2000-2002. Money Morning - We Make
Investing Profitable. https://moneymorning.com/2015/06/12/the-dot-com-crash-of-2000-
2002/
Hayes, A. (2019). Dotcom Bubble. Investopedia.
https://www.investopedia.com/terms/d/dotcom-bubble.asp
References
