I
On January 4, 2000, Alan Greenspan made the five-minute trip from the Fed’s headquarters in Foggy Bottom to the White House, where President Clinton nominated him for another four-year term of office. The president boasted about the records that the U.S. economy was setting—unemployment at a thirty-year low, poverty at a twenty-year low, welfare rolls at a thirty-two-year low—and paid tribute to Greenspan’s intellect. The Fed chairman had been one of the first economists to recognize “the power and impact of the new technologies on the New Economy, how they changed all the rules and all the possibilities.” In fact, the president went on, Greenspan’s “devotion to new technologies has been so significant, I’ve been thinking of taking Alan.com public; then, we can pay the debt off even before 2015.”1
The joke was closer to the truth than the president imagined. Greenspan’s policies had played a central role in the stock market boom. The biggest danger to any bull market is the possibility that the central bank will raise interest rates sharply, stopping the economy in its tracks and decimating corporate earnings. Greenspan had been resisting pressure to tighten monentary policy for several years. During 1999, the Fed did raise rates on three occasions, by a quarter percentage point each time, but these hikes only reversed the emergency rate cuts it had introduced in the fall of 1998 following the collapse of Long Term Capital Management. At the start of 2000, short-term interest rates stood at 5.5 percent—almost exactly where they had been in the summer of 1995, when Netscape went public.
Low interest rates weren’t Greenspan’s only contribution to the stock market boom. His frequent references to the benefits of new technology, and his refusal to criticize excessive speculation, also played an important role. In August 1999, Greenspan said stock prices reflected “judgments of millions of investors, many of whom are highly knowledgeable about the prospects for the specific companies that make up our broad stock price indexes.”2 Instead of second-guessing these educated judgments, the Fed ought to stick to monitoring inflation pressures in the economy, he concluded. Most commentators accepted Greenspan’s reasoning, but it wasn’t wholly supported by history. The very reason the Fed was founded in 1913 was to prevent a repeat of the speculative busts that had become increasingly common in the previous half century. If investors were always rational and sensible, there would be no need for an authority figure to oversee the financial markets. (A central bank would still be needed to manage the money supply.) Unfortunately, investors are not always on their best behavior. Sometimes they succumb to greed and the herd mentality. In these instances it is up to the Fed chairman, invested with all the intellectual and political authority of his office, to try to restrain them.
Raising interest rates is the usual way to restore sanity, but it isn’t the only option. Greenspan could have tried to limit margin lending, which the Securities Exchange Act of 1934 empowered him to do. After growing rapidly during 1999, margin debt reached $243.5 billion in January 2000. At that level, it amounted to 1.57 percent of the stock market’s total value, which equaled the previous peak in the fall of 1987. The Fed already regulated margin lending by forcing investors to pay for half of their stock purchases in cash, meaning the “margin requirement” was 50 percent. Senator Charles Schumer and others were calling for the margin requirement to be raised to 60 percent or higher, but Greenspan refused to act. He considered such a move unfair to small investors. Professional investors could often lend money to buy stocks without resorting to margin loans; small investors couldn’t. Plus, the basic idea of regulating lending decisions offended Greenspan’s free market principles. If investors wanted to put their money into the stocks of Amazon.com or 1-800-FLOWERS.com, that was their business. As he had frequently pointed out, the act of taking calculated risks is the essence of capitalism.
All the same, even Greenspan was increasingly worried about what was happening in the stock market. Since his speech in August 1999, the Nasdaq had risen another 1,000 points, and day trading had become more popular. It was hard to classify people buying and selling stocks whose names they hardly recognized as calculating, well-informed investors. To the Fed chairman, they looked more like day trippers to Atlantic City plunging on red or black. Privately he joked that he would like to introduce a law prohibiting day traders from buying a company’s stock unless they could identify the product it produced. Greenspan still believed it was impossible to identify a speculative bubble definitively, except in retrospect, but he was now pretty much convinced that one had developed, at least in parts of the stock market. When he looked at the prices that investors were paying for Internet stocks, he found them bizarre.
Moreover, the real economy and the financial economy were now intertwined—a classic symptom of a late-stage speculative bubble. The rising stock market had fueled an unprecedented spending spree on the part of consumers and firms, which, in turn, had caused economic growth to accelerate. In 1998, the economy expanded by 4.8 percent, about twice its long-term growth rate. In 1999, the rate of expansion rose to 5.0 percent, well above the rate that even most proponents of the New Economy thesis believed to be sustainable. Early in 2000, there was no sign of growth slowing. If anything, it seemed to be accelerating further. In December 1999, the U.S. economy created another 315,000 jobs, automobile manufacturers announced that they had their best year ever, and retailers reported a strong Christmas season. American consumers were now spending every dollar they earned, and then some. According to some measures, the personal savings rate had dipped into negative territory, which meant that people were borrowing, or running down their assets, to finance their spending. Greenspan had been proceeding on the assumption that the Fed could concentrate on the real economy—inflation, unemployment, and productivity growth—and ignore the ups and downs of the stock market. This assumption was no longer tenable. As a result of the stock market boom, the economy was threatening to spiral out of control.
On January 13, 2000, Greenspan outlined his latest thinking about the economy to the Economic Club of New York. He began with his now-familiar theme that “awesome changes” were taking place in “the ways goods and services are produced and, especially, in the way they are distributed to final users.”3 The development of information technology, including the Internet, had provided firms with much more timely information about their markets and their suppliers. This had enabled them to reorganize production, cutting out unnecessary labor and inventories. Between 1995 and 1999, labor productivity had grown at an annual rate of 2.8 percent, double the 1.4 percent rate recorded between 1973 and 1995. “In short, information technology raises output per hour in the total economy principally by reducing hours worked on activities needed to guard against the unknown and the unanticipated,” Greenspan said.4
On this occasion, he didn’t linger on the productivity debate. His main purpose wasn’t to praise the New Economy, but to point out its dark side. Accelerated productivity growth had two effects. On the supply side of the economy, it encouraged firms to expand capacity. On the demand side, it sparked a run-up in stock prices, as investors looked forward to the higher profits that the new technology would generate. The rise in stock prices, in turn, led to an increase in consumer spending through the “wealth effect.” People felt richer, so they spent more. The argument so far was familiar to anybody who has taken Econ. 101, but here Greenspan introduced a twist. The expansion in firms’ capacity took time to come on line, he explained. Building factories and getting all the new technology to work together was no simple matter. By contrast, the rise in stock prices, and the concomitant increase in consumer spending, was immediate. Consequently, overall demand in the economy rose faster than overall supply. It was this “imbalance between growth of supply and growth of demand that contains the potential seeds of rising inflationary and financial pressures that could undermine the current expansion.”5 For the past few years, the gap between supply and demand had been met by drawing more people into the workforce, many of them immigrants, and by importing more goods from abroad. But this couldn’t go on forever. When these buffers were exhausted, the excess demand would be filled by rising prices.
It was a convoluted argument, which attracted criticism from academic economists when they began to study it, but its internal logic mattered less than its practical consequences. Greenspan had finally come up with an economic rationale for interfering with the stock market. To reduce the risk of inflation, the wealth effect would have to be attenuated. This “does not mean that prices of assets cannot keep rising,” Greenspan explained, “only that they rise no more than income.”6 With personal income growing at about 6 percent a year, this implied that stock prices could grow by 6 percent too. In the current environment, such a return was piddling. The Nasdaq had just returned almost 90 percent. Most investors weren’t expecting a repeat performance in 2000, but they were looking for a lot more than 6 percent. If Greenspan was serious about disappointing them, which he seemed to be, it could only mean one thing: higher interest rates were on the way.
II
The day after Greenspan’s speech, the Dow hit an intra-day high of 11,908.50 and closed at 11,723. Nobody knew it at the time, but the index had peaked, at least for this economic cycle. During the following two weeks, the Dow fell by almost 1,000 points, taking it back below the 11,000 level, as investors began to digest the possibility of an interest rate hike. Internet stocks slumped, particularly the stocks of online retailers, which were hit by disappointment over the holiday buying season. Amazon.com had shipped 20 million orders, 5 million more than it expected, but in early January 2000 it announced that its losses for the fourth quarter of 1999 would be considerably higher than the $150 million that Wall Street was already expecting. Its stock, which a month earlier had been trading above $100, fell back to $70. Stock in eToys, which had reached $70 before Christmas, dropped below $20. Value America, which once traded at $75, fell to $5. The stocks of online communities, once a raging fad, were being ravaged. IVillage, a $130 stock in the wake of its IPO, was below $20, and so was TheStreet.com. As for TheGlobe.com, it was trading in single figures. At the end of January, Todd Krizelman and Stephan Paternot, the two former Cornell students who had founded the company, said they were stepping down as co–chief executives in favor of a more experienced manager. The announcement was laden with symbolism. Just fourteen months earlier, TheGlobe.com’s IPO had marked the beginning of the Internet bubble’s epic stage. The Internet stocks that continued to defy gravity were mainly Internet infrastructure companies, such as Akamai Technologies and Inktomi, and B2B plays, such as Ariba and Commerce One. But even some B2B stocks were falling. Healtheon, Jim Clark’s ambitious attempt to move the health care industry online, was one of the strugglers. Despite acquiring its main rival, Web MD, the Silicon Valley company had persuaded only 80,000 doctors, about one in eight, to use its physician site. Healtheon’s stock, which peaked at more than $125 in May 1999, had fallen back to $70, and it was still heading in the wrong direction.
On Sunday, January 30, 2000, Super Bowl XXXIV took place in Atlanta. The St. Louis Rams beat the Tennessee Titans 23–16, but the real business of the day took place during the commercials. In 1996, Autobytel, an online car retailer, started the trend of Internet companies advertising during the Super Bowl. When its ad generated a lot of traffic on its Web site, other companies noticed. Due to the demand from dotcom companies, the cost of a thirty-second Super Bowl spot had now risen to about $2 million. In 2000 there were seventeen Internet advertisers willing to pay that price. They included some familiar names—Charles Schwab, E*Trade, Pets.com—but also a number of unknown firms that were desperate to increase their name recognition in the hopes of scoring a successful IPO before time ran out: Computer.com, Epidemic.com, Onmoney.com, Lifeminders.com, kForce.com, and Ourbeginning.com. The sight of these companies spending millions of dollars to try to attract the attention of sozzled and semisozzled football fans was an apt metaphor for the Internet boom. A once good idea had degenerated into a nonsensical ritual. Even sober television viewers seldom remember more than one or two of the ads they watch—a fact confirmed by Harris Interactive, a Rochester-based polling firm, which surveyed the Super Bowl viewers.7 More than half of the respondents said they recalled seeing E*Trade’s offbeat ad, which featured a dancing chimpanzee and the line “We just wasted two million bucks,” and four out of ten remembered the Pets.com sock puppet. But just three in a hundred recalled Computer.com’s ad, and even fewer remembered kForce.com.
On the morning of February 2, Greenspan and the rest of the FOMC gathered around a twenty-five-foot-long table in the Fed’s grand boardroom. During World War II, Franklin D. Roosevelt and Winston Churchill commandeered this room to plan the allied campaign to liberate Europe. Greenspan and his colleagues didn’t have Nazi Germany to worry about, but they were increasingly concerned about the economic expansion, which at 107 months old was now the longest ever. They had come close to raising interest rates in December, but had held back because of fears about Y2K computer problems. When the change of dates passed off uneventfully, there was no need for further restraint.
The Fed’s senior economists started the meeting with a review of recent developments, which confirmed that the economy was still growing strongly. Consumer price inflation remained low, but there were signs that wage inflation and commodity prices, particularly the price of oil, might be picking up. The presidents of the twelve regional reserve banks reported that all parts of the country, agricultural areas excepted, were sharing in the boom. When the policy discussion began, the only issue of contention was how far to raise the federal funds rate. Some members of the committee wanted an immediate half-point increase in order to signal the Fed’s determination to get a grip on the economy. The majority thought that a quarter-point hike would do the job, at least for now. Greenspan, who usually favored moving gradually, sided with the majority. The committee agreed to raise rates by a quarter point and couple the move with a public warning that more hikes might well lie ahead. The meeting ended just before noon. After lunch, the Fed announced it was raising the federal funds rate from 5.5 percent to 5.75 percent. In a statement, the FOMC said it “remains concerned that over time increases in demand will continue to exceed the growth in potential supply, even after taking account of the pronounced rise in productivity growth. Such trends could foster inflationary imbalances that would undermine the economy’s record economic expansion.”8 It was a historic moment. In language that was almost the same as that Greenspan had used in New York a few weeks earlier, the Fed had formally abandoned its hands-off approach to the stock market. The speculative bubble had entered its terminal phase.
III
There was no immediate panic. The Dow closed the day down 37.85 points, but the Nasdaq posted a gain of twenty points. Many people on Wall Street were relieved that the Fed had only raised rates by a quarter of a percent. In the following days, a more elaborate form of denial took hold: investors and analysts convinced themselves that higher interest rates wouldn’t affect technology companies. The day after the rise in interest rates, the Nasdaq shot up 137 points to 4,210.98, a record high. The Nasdaq rose again the next day, and the day after that, and the day after that. A week after the Fed’s move, the index had risen by almost 10 percent. In the middle of February, the Nasdaq broke through 4,500, and for the first time the number of shares traded on the exchange topped 2 billion. The Dow, meanwhile, was stuck in a correction that had begun in January. On February 11, it closed below 10,500. “When Alan Greenspan speaks, the Old Economy trembles,” Floyd Norris, a financial columnist for The New York Times, noted. “But the new one thinks it is impervious to higher interest rates, and shrugs off warnings from the Federal Reserve chairman.”9
What was happening made no sense. Technology companies were leading the economy’s growth, and a Fed-engineered slowdown was bound to hit their business hardest. But investors had developed a blind faith in anything to do with the Internet and computers. “The Italians want to be in this market, and they want to own technology,” John Manley, an equity strategist at Salomon Smith Barney who had just returned from a trip across the Atlantic, assured a reporter. “That is true throughout Europe.”10 One commentator, to his credit, did face up to reality. Michael Mandel, Business Week’s economics editor, who had previously been a big supporter of the New Economy, pointed out that in a downturn many technology firms would be hit by a “double whammy” of fixed costs and slumping revenues. “Sooner rather than later, the New Economy boom is likely to be followed by a New Economy bust,” Mandel wrote.11
On Wall Street, where Internet IPOs were still coming thick and fast, nobody wanted to listen to that sort of scaremongering. But despite the Nasdaq’s upward march, the days had gone when any company with “.com” in its name was guaranteed a hero’s welcome from investors. The market had entered what Hyman Minsky, an economist who specialized in financial manias, termed the stage of “revulsion.” This takes place at the very peak of a bubble. Investors realize the game is almost up, and they become more discriminating. Some discreetly cash in their gains. The market has some good days, and it may even rise further, but it also becomes increasingly volatile amid the general recognition that the easy money has already been made.
On Friday, February 11, there were no fewer than ten IPOs, including the Wall Street debut of Pets.com. Despite its memorable Super Bowl commercial, the San Francisco–based company’s financial report card looked disturbingly similar to those of other online retailers whose stocks had recently been battered. In 1999, Pets.com lost $62 million on revenues of less than $6 million. It was still selling its products below cost, and there was no sign of the ruinous competition in its market abating. Merrill Lynch managed the Pets.com IPO. Since hiring Henry Blodget a year earlier, the big retail brokerage had made a determined push into the Internet IPO business, and Pets.com was its best-known client. There were rumors on Wall Street that Morgan Stanley and Goldman Sachs had turned down the Pets.com offering, but Julie Wainwright, Pets.com’s chief executive, insisted that she had chosen Merrill for its army of retail stockbrokers and because of Blodget, whom she described as “an A+ analyst.” Finding buyers for Pets.com stock was not easy. Before the market opened, Merrill priced 7.5 million shares at $11 each. When trading started, the stock rose to $14, but by the close it had fallen back to $11. When the markets reopened after the weekend, the stock fell back below the offering price. On Tuesday, February 15, it closed at 7 1/2.
This was sad news for Pets.com’s investors, who had been hoping for a big IPO pop, for PetsMart.com and Petopia.com, whose IPO plans were now threatened, and for many other Internet companies. Pets.com had faithfully followed the Wall Street recipe for online success. It had raised a lot of money from investors and then spent heavily to build up its brand name, even though this meant incurring massive losses. The Pets.com sock puppet, which had featured in thirteen different ads, was now instantly recognizable; it had even appeared on Good Morning America and Nightline. But the sock puppet’s popularity hadn’t done much for Pets.com’s business or its stock. Brand awareness, it turned out, didn’t guarantee success.
Slowly but surely, Internet investors were beginning to concentrate on the one performance measurement they had previously avoided: profitability. Companies like America Online and eBay, which both made money, continued to do well. On February 8, eBay’s stock, which had started the year at $125, reached $175. Strangely enough, the new focus on profits also gave Amazon.com’s stock a temporary boost. At the start of February, the company announced that it lost $323 million in the fourth quarter of 1999, a 700 percent increase on the previous year. But Jeff Bezos insisted that these losses represented a “high-water mark” that would now recede as he led a “drive toward profitability.”12 Amazon.com was already making a profit on book sales, which still accounted for almost half its revenues, Bezos insisted. The Wall Street analysts applauded. Jamie Kiggen, of Donaldson, Lufkin & Jenrette, said the quarterly results demonstrated that Amazon.com was “a business that can become quite profitable.”13 Blodget, who had previously criticized Amazon.com for ignoring profitability, upgraded the stock from “accumulate” to “buy.”
For a few days, the market accepted this upbeat analysis, and Amazon.com’s stock rose from below $70 to above $80. When investors looked closely at the earnings report, they had second thoughts. For all Bezos’s protestations to the contrary, the numbers showed that his company was still subject to what might be called Amazon’s Law: the more money it took in, the more money it lost. Comparing 1999 to 1998, Amazon.com’s sales had more than doubled, from $609 million to $1.6 billion, but its marketing and sales costs had more than tripled, from $133 million to $413 million, and its net losses had increased almost sixfold, from $125 million to $720 million. Thanks to this dismal performance, the $1.75 billion that the company had raised from investors was fast running down. The cash and marketable securities in Amazon.com’s treasury—$705 million—didn’t even cover its annual losses. By the end of February, the stock had fallen back below $70.
IV
On February 23, 2000, Greenspan, appearing before the Senate Banking Committee, defended his new policy toward the stock market. Senator Phil Gramm of Texas, the chairman of the Senate Banking Committee, introduced Greenspan by saying that he, for one, was not going to question the policies of “the most successful central banker in the history of the United States.”14 Senator Jim Bunning of Kentucky, another Republican, was less reticent. He called the Fed’s decision to raise interest rates “misguided” and said it could become “more of a threat to our economy than inflation will ever be.” Greenspan’s prepared statement was a recitation of the arguments he had made in New York a month earlier. The economy, fueled by the stock market’s remarkable ascent, was growing too strongly. Although there were few visible signs of inflation, the pool of available workers was shrinking, and this could not continue indefinitely without sparking rising prices. The only way to close the gap between supply and demand was to raise interest rates.
When the Fed chairman had finished reading, the senators didn’t hide their displeasure. Paul Sarbanes of Maryland, the ranking Democrat, said Greenspan’s fixation on the “wealth effect” threatened the job prospects of inner-city youths who had never owned a stock in their lives. Connie Mack, a Florida Republican, presented a graph that he claimed showed that there was no historical relationship between stock prices and inflation. Even Gramm sounded a critical note: “I think people hear what you are saying and conclude that you believe that equities are overvalued. I would guess that equities are not only not overvalued but may still be undervalued.”15 Bunning, his face stern, let the Fed chairman have it. “Why do we want to contain the growth and wealth effect in this country?” he demanded. Greenspan tried to explain, but Bunning cut him off: “If we get interest rates at double digits, we are going to stop the economy in its tracks. I don’t want to see that happen on your watch, and I surely don’t want to see it happen on my watch.” “I appreciate that, Senator,” Greenspan said quietly. “I have the same view.”16
For once, the Fed chairman looked taken aback. His lined face, with its bulbous nose and long, narrow mouth turned down slightly at the corners, had an even more mournful cast than usual. As he stared through his thick spectacles and blinked his sad brown eyes, it was easy to see why his nickname in Ayn Rand’s circle had been “the undertaker.” For more than two hours, he patiently tried to explain why it was necessary to bring to an end to the great stock market boom that the country had enjoyed for the past five years. The people’s representatives, faithfully reflecting the views of their electors, howled. The last thing they wanted in an election year was a stock market crash.
Greenspan was now facing the biggest challenge of his career. At the start of the 1990s, he had raised interest rates to head off rising prices and caused a recession, but then, at least, the threat of rising inflation had been visible. Now, most people outside the FOMC couldn’t see any sign of inflation picking up. “We are suggesting, as an institution, that the stock market is too high, and that we are going to rein in inflation that’s not there yet,” a senior Fed official lamented. “What [Greenspan] did in 1987 was important, but it was what you would expect a central banker to do—try to calm the markets and assure financial stability. This is much less straightforward.”17
For the moment, technology investors continued to ignore the Fed. The day of Greenspan’s appearance on Capitol Hill, the Nasdaq enjoyed its biggest points gain ever—168.21—and closed at another all-time high. Internet stocks had a particularly strong session. EBay jumped twenty points; America Online jumped eight. Henry Blodget and a colleague of his contributed to the good cheer, issuing a report that said America Online “seems undervalued by almost any measure.”18 The rotation from stocks that would be vulnerable in a slowdown (Old Economy companies) to those that would supposedly prosper indefinitely (New Economy companies) continued apace. On February 25, the Dow closed below 10,000 for the first time in almost twelve months.
Internet investors were not the only ones looking on the bright side. When Bob Simon, a veteran CBS News war reporter, interviewed a number of prominent young Internet executives for 60 Minutes II, he found few signs of nervousness. Josh Harris, the founder of Pseudo.com, a fledgling online television network that produced about sixty youth-oriented shows from its studios in Soho, told Simon that his aim was “to take you guys out of business. I’m in a race to take CBS out of business.” A couple of weeks after Simon’s interview aired, New York magazine ran a cover story on Silicon Alley’s “Early True Believers,” a group of artsy Ivy League types who had become involved in the Internet when it was still an alternative medium. “We had amazing cultural timing,” Rufus Griscom, the cofounder of Nerve.com, said. “It’s incredibly powerful to feel that you are one of seventeen people who really understand the world.”19 Jason McCabe Calcanis, the editor of the Silicon Alley Reporter, a fawning glossy magazine, was equally portentous: “The metaphor for Silicon Alley is the people who reinvented film in the late sixties. It’s the Dennis Hoppers and Scorceses and Coppolas—the people who didn’t care about Hollywood and wanted to build something new.”20
In the stock market, the rush to embrace technology continued. In the first three days of March, the Nasdaq gained another two hundred points. On March 2, 3Com, a Silicon Valley telecommunications equipment manufacturer, issued shares in its Palm Computing subsidiary. The underwriters originally estimated the issue price at $12 to $14, but demand was so strong that on the eve of the offering they raised the price to $38. When trading started, the stock surged almost $60, closing at 95 1/16. At that price, Palm’s $54.3 billion stock market valuation dwarfed the $28 billion valuation of its parent company, 3Com. To a connoisseur of Wall Street mathematics, there was a certain beauty in these numbers. Since 3Com still owned the 95 percent of Palm’s stock that hadn’t been issued, the market was placing an implicit value on the rest of the company of about negative $22 billion.
Investors had lost faith in second-tier online retailers, but they were still willing to pay almost any price for companies that appeared to embody the electronic future. Among companies in the Nasdaq 100 index, the average PE ratio was now well over 100. Cisco Systems, which supplied routers for the Internet, was vying with Microsoft and General Electric to be the company with the biggest stock market valuation. Seven of the fifteen most valuable companies in the world were technology firms: Microsoft, Cisco Systems, Intel, Oracle, Lucent Technologies, Nortel Networks, and Sun Microsystems. Every one of these firms made products that were used on the Internet. Speaking to an investment conference in Miami, James Cramer told the crowd to forget everything they thought they knew about the stock market: forget profits; forget value; and forget long-term investing. The only stocks worth holding, Cramer claimed, were technology companies. “Winners win!” he bellowed. (In his saner moments, even Cramer was having some doubts about the market. Writing on TheStreet.com, he advised investors to cash in some of their profits.)
V
On March 6, 2000, Greenspan turned seventy-four. To celebrate his birthday, he appeared at a conference on the New Economy at Boston College, where Edward Markey, a Democratic congressman from Massachusetts, introduced him as the “Babe Ruth of our economic policy.” A chocolate cake with six lighted candles was brought on stage, and as Greenspan blew them out Markey led the crowd in a rousing version of “Happy Birthday, Mr. Chairman.” Greenspan walked over to the microphone and said, sheepishly: “If I’d known all this was about to happen, I would have been on my way to San Francisco.” In the speech that followed, he traced the New Economy to the development of the transistor after World War II. “It brought us the microprocessor, the computer, satellites, and the joining of laser and fiber-optic technologies. By the 1990s, these and a number of lesser but critical innovations had, in turn, fostered an enormous new capacity to capture, analyze, and disseminate information. It is the growing use of information technology throughout the economy that makes the current period unique.”21 The changes in the economy were exemplified by the “multiplying uses of the Internet” and the proliferation of start-up firms trying to exploit them. Investors were “groping for the appropriate valuations of these companies,” which indicated the “difficulty of divining the particular technologies and business models that will prevail in the decades ahead.”
As he stood there and described the benefits of technology-driven capitalism, Greenspan sounded much like he must have done in the early 1960s, when he was writing for Rand’s Objectivist Newsletters, describing capitalism as a “superlatively moral system”22 and dismissing the welfare state as “nothing more than a mechanism by which governments confiscate the wealth of productive members of a society.”23 Back then, Greenspan’s right-wing views were considered extreme; forty years later, faith in the free market was practically universal. Ironically, Greenspan, though still a true believer, was now the government official charged with bringing American capitalism to heel. After the rhapsody portion of his speech, he turned to the more prosaic issues of monetary policy. Continued prosperity, he said, depended upon a “macroeconomic environment of sustained growth and continued low inflation. That, in turn, means that the expansion of demand must moderate into alignment with the more rapid growth of aggregate supply.”24 The message was clear: interest rates would be going up further.
Still, most people on Wall Street weren’t listening. The following day, March 7, the Nasdaq broke through 5,000 for the first time, but then dropped back. On Thursday, March 9, 2000, the index jumped 150 points, and this time it held on to the gain. When the market closed, the Nasdaq stood at 5,046.86. Moving from 3,000 to 5,000 had taken just four months. Internet stocks, despite the setbacks some of them had encountered, were also at an all-time high. On Thursday, March 9, the Dow Jones Internet Composite Index closed above 500 for the first time, at 509.84. In the past twelve months the index had risen by about 130 percent.