Dot.con: How America Lost Its Mind and Money in the Internet Era Paperback – Bargain Price, May 1 2003
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“The first good book about one of capitalism’s most embarrassing debacles.” (Salon.com )
“Admirably lucid and comprehensive.” (The Guardian (London) )
“A marvelous book. . . . Dot.con will be read by generations of .... B-school graduates.” (Wall Street Journal )
John Cassidy is one of the world’s best financial journalists. Dot.con [is] compelling. (Rupert Murdoch )
“John Cassidy’s [Dot.con] deserves to be the boom’s standard account. It is informative, perceptive, and gracefully written.” (New Republic )
“Shrewd and entertaining...thoroughly persuasive.” (The Economist )
About the Author
John Cassidy, one of the country's leading business journalists, has been a staff writer at the New Yorker for six years, covering economics and finance. Previously he was business editor of the Sunday Times (London) and deputy editor of the New York Post. He lives in New York.
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The author pinpoints three groups and/or individuals that he feels are specifically to blame for allowing this fiasco to occur.The first group is the financial journalists and analysts,such as Mary Meeker ,Blodgett,and Abby Joseph Cohen,who used their positions to hype the sale of Dot.com stocks that they knew were purely speculative in nature.The second is a group of one,Alan Greenspan.The author overlooks that Greenspan had no authority over the giant investment banks that were the source of the problem.They were supposed to be regulated by the Securities and Exchange Commission(SEC).Unfortunately,the SEC had been stuffed full of University of Chicago type economists, who did not believe that bubbles were possible ,based on their artificially constructed Efficient Market Hypothesis(EMH).
.Of course,Benoit Mandelbrot had already demonstrated repeatedly over the time period 1958-2008 that the EMH was false.The economists at the SEC simply refused to accept the ancient wisdom of Adam Smith-the goal of all financial regulation is to prevent speculation.Greenspan certainly is partly culpable,however.
The third group is the American public,which,as first pointed out by Michael Lewis,came to believe that the way to riches was not productive,hard work but speculating in stocks.
I have subtracted one half of a star because the author is apparently ignorant of the fact that Adam Smith devoted 80 pages in The Wealth of Nations(1776;Modern Library(Cannan)edition with the foreward by Max Lerner) to discussing the problem of banking and speculation.Smith was well aware of the severe problems resulting from the Mississippi and South Seas bubbles inthe 1719-1721 time period.Smith also knew that such bubbles could not inflate without the explicit support of the private banking industry.Smith's solution was the creation of a central bank that would prevent the private banking industry from making loans to three categories of borrower-projectors,prodigals,and imprudent risk takers.These three categories are the same as Keynes's two categories,speculators and rentiers ,in The General Theory(1936).Smith's policy is thus a preventive one-do not allow the savings deposits of savers to be loaned out to speculators.Smith's warning is very clear.Loans made to speculators will be wasted and destroyed.That is precisely what happened in the Dot.Com bubble and has happened in every bubble in history.
A final point to ponder was the author's belief that the Dot.Com bubble was an aberration that would not be repeated.Unfortunately,it was quickly followed by simultaneous bubbles in housing and the DOW.These bubbles have also collapsed,just as predicted over 230 years ago by Adam Smith.Unfortunately,Greenspan,Paulson,Bernanke,et. al.,never read Smith.
John Cassidy points out numerous times throughout the book that the speculation of these internet stocks was perpetuated by Wall Street. Virtually every internet IPO was based on potential earnings and income growth. Therefore, no one had any idea on how to value the stocks because there were no earnings or even a consistent revenue stream to for that matter. However, Wall Street just started creating new valuation models based on number of web-page hits and current revenue and extrapolated out into the future assuming that web traffic would continue to increase exponentially, while costs would decrease due to these websites not incurring the typical costs that traditional firms were saddled with. While web traffic has continued to increase and more and more people are connected to the Internet than ever before, the costs of acquiring these customers, through significant price reductions and huge marketing budgets never waivered, bankrupting mostly all of these websites.
In addition to haphazardly marketing the IPOs for these websites, each investment bank on Wall Street and Silicon Valley were using their analysts to justify these IPO valuations. The research divisions within the investment banks were traditionally independent of the sales and brokerage division. During this era, the supposed "Chinese Wall" was torn down. What resulted was an environment where independent analysts were hyping the stocks the investment banks were marketing to their clients and ultimately, individual investors.
While Cassidy does place a significant amount of blame on Wall Street, he also implies that Alan Greenspan could have done much more by raising interest rates while the speculative bubble was forming. This would have slowed capital into the equity markets and potentially prevented the bubble from popping.
Looking at the parallels between the internet stock crash and the housing market crash is pretty remarkable. In each instance, individual investors are the ones who are suffering. During each IPO, the investment banks would sale the first offerings of their stocks to their preferred customers, typically institutional investors (mutual funds, pension funds, etc,). Through the marketing machine that hyped these investment vehicles, individual investors were eager to get their hands on these shares as they wanted to benefit from the coming technological age. Therefore, individual investors were not able to access shares until after the institutional investors sold theirs. For example, if Pets.com issued 5 million shares at $5 a piece, the institutional investors might get them at $5 a share, but as demand in the markets increased, they would then sale them at say, $10. Inevitably, once the markets realized the company had no real earnings potential, the stock would plummet and it would end up below the initial IPO. During that chain, the investment bank raked in their huge fees for the IPO, their best clients realized huge gains by being able to buy these stocks before the rest of the public and then, by the time the public had access to these stocks, they were overpriced but since everyone else was doing it, the public continued to snatch up any shares.
Compared to the housing mess, we had Wall Street peddling Residential Mortgage Backed Security (RMBS) bonds as safe investments. The demand for these investment vehicles increased, creating a situation where banks were focused on generating loans. Basic underwriting principles were ignored and housing prices continued to increase. Eventually the good times ended and when owners get in over their heads and foreclosures started increasing resulting in the crash of the housing market.
In both instances, critics have charged that Wall Street and the Federal Reserve, still chaired by Alan Greenspan, could have prevented this. As a free-market economist, I believe that, unfortunately, things like this can never be prevented and as we enter an age where globalization has intertwined the economies of nearly every nation, these panics an crashes will tend to be the norm. It was very ironic to read Cassidy's epilogue where the implication is that this might never happen again and it only took five years for the next speculative crash.
A final remark: in my edition (2003, with a post-9/11 afterward) there were very few typos and glaring mistake. For example, Altair was named after a star mentioned in Star Trek, not Star Wars, as mentioned by a reviewer. The early history of the internet is sketchy, but appropriately succint, given that the topic has been eviscerated in thousands of articles and books. On the other side, the events between 1993 and 2001 are covered in detail.