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The Dot-com Bubble

Why the Dot-com Bubble Burst

Explain why share prices rose so far in the late 1990s and why they turned, how investment rose and fell with them and what the CBO and CEA concluded about the 2001 recession, and what followed.

Before you start

What you'll be able to answer

  1. Why did share prices rise so far?
  2. Why did share prices turn down from 2000?
  3. How did investment move with the share boom, and what part did it play in the recession?
  4. What followed the fall in share prices?

Where this sits

The Dot-com Bubble ยท this module is lit

  1. 5 Dec 1996Alan Greenspan, chairman of the Federal Reserve, the US central bank, asks how anyone could know when "irrational exuberance" has pushed asset prices, the prices of things such as shares, too high
  2. 30 Jun 1999The Federal Reserve starts raising its target for the federal funds rate, the interest rate banks charge each other for overnight loans
  3. 22 Jul 1999Greenspan tells a committee of Congress that share prices could be driven to levels that cannot be supported
  4. Mar 2000Technology shares reach their monthly peak
  5. 16 May 2000The Federal Reserve makes the last of its six rate rises
  6. 3 Jan 2001The Federal Reserve changes its target rate for the first time since May 2000
  7. Mar 2001A recession, a broad fall in economic activity, begins, as the National Bureau of Economic Research, which dates US recessions, later finds
  8. Nov 2001The recession ends, on the same body's dating
  9. 28 Apr 2003Ten investment firms settle charges that their banking business, helping companies sell shares, swayed their analysts' research, the advice they publish on which shares to buy

Greenspan warned Congress about share prices in July 1999

In July 1999 Alan Greenspan, chairman of the Federal Reserve, the US central bank, spoke to a committee of Congress. Faster growth in productivity, the output for each hour of work, could raise profits, he said, and that prospect had supported higher share prices. But he warned that a euphoric run of optimism could push equity prices, the prices of shares, to levels that are "unsupportable even if risks in the future become relatively small".

Predict first

Labour productivity, the output for each hour of work, grew 1.6 per cent a year in 1991-95. How fast do you think it grew in 1995-2000?

Productivity grew faster after 1995

On the figures of the Congressional Budget Office (CBO), which forecasts the economy and the budget for Congress, labour productivity grew by 1.6 per cent a year from 1991 to 1995 and by 2.6 per cent a year from 1995 to 2000. The CBO put the speed-up down mostly to high business investment, spurred by advances in information technology (IT), meaning computers, software and communications equipment, and by a surge in share prices that made it cheaper for firms to raise money.

Greenspan argued in 2002 that bubbles, surges in asset prices to levels that cannot last, are often set off by what investors see as real improvements in productivity and profits.