[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

e-Insight
THE DOT-COM BUBBLE AND MACROECONOMIC
STABILITY
Just think if in June 1996 you had invested $20,000 in a littleknown
and fledgling new company called Yahoo. It would have
been a risky decision; Yahoo was offering a free service to users
of the Internet—something that most Americans still knew
little about. A share of stock in Yahoo was selling for $2.09.
It would have been a great investment decision. As the year
2000 dawned, each share of Yahoo’s stock was worth $176.50 and
your $20,000 investment would have been worth $1,688,995!
This represented a 255 percent annual return. A year later, in
January 2001, things would have looked a bit different. You
would no longer be a millionaire, since your Yahoo stock had
plunged until it was worth only $262,010, a fall of 84 percent.
Each of your shares would have been selling for just $27.38.
The experiences of Yahoo were mirrored by hundreds of
other dot-com firms that had begun in the 1980s and 1990s as
small start-ups and then saw their share prices break all
records for growth as investors clamored for their shares when
these companies “went public.” Thousands of dot-com millionaires,
and quite a few billionaires, were created, and millions
of Americans who had never before thought of investing
in stocks started speculating in the market. Fluctuations in
the New York Stock Exchange or the Nasdaq exchange became
part of daily conversations. But just as quickly, it seemed, the
high-flying days ended during 2000. Dot-com start-ups started
going bankrupt, and the technology-heavy Nasdaq index, after
reaching a peak at just over 5,000 in March 2000, had fallen
to 2,291.46 by New Year’s Day in 2001. By March 2001, it was
below 2,000.
The stock market affects macroeconomic conditions and
in turn is influenced by economic conditions. Several times
during the 1990s, the stock market was feared to be a source
of instability in the economy. For example, consumption spending
was fueled by soaring stock prices in the mid-1990s, a situation
that concerned the Federal Reserve for two reasons.
First, increased consumption spending in an economy already
experiencing a strong expansion threatened to overheat the
200
180
160
DOLLARS PER SHARE
140
120
100
80
60
40
20
0
June
1996
Dec.
1996
June
1997
Dec.
1997
June
1998
Dec.
1998
June
1999
Dec.
1999
June
2000
Dec.
2000
THE PRICE OF YAHOO’S STOCK
744 ∂ CHAPTER 33 THE ROLE OF MACROECONOMIC POLICY