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Fallout From the Dot Com Meltdown

By cretin in Op-Ed
Wed May 09, 2001 at 07:14:53 AM EST
Tags: Culture (all tags)
Culture

A year after the dot com industry took a nose dive, the rubble hasn't stopped bouncing. Every few days, we get to hear from another journalist on why the new economy was no different from the last "new economy."

It's an all too frequently recited fact that the new economy was composed almost entirely of companies who's hopes of someday turning a profit were all but non-existent. Frequent reference is made to NetJ, a company with a business plan that included no plans to do any business. Other correspondents compare the dot com bubble to the South Seas bubble, or the Dutch tulip mania. It is with a sense of momentous revelation that these pearls of hindsight are delivered. In the aftermath of the dot com meltdown, it has been made plain that the new economy was mostly made up of pseudo-visionary pitches to venture capitalists and other forms of hot air. What the pundits neglect to mention is that everybody knew this years ago. Bleating about the illusory business plans of the internet economy is missing the point by such a wide margin as to be almost irrelevant. We knew these companies were doomed to fail. We also knew that it simply did not matter.


In a market in which shares yield no dividends, traditional investment is meaningless. Trading on the future profits of a company should be the exclusive domain of the true believer and other victims of their own naivete. Why then, were these companies attracting such vigorous attention? How did they give rise to the day trader, by definition the opposite of a true believer? The day trader placed no trust in the stocks he played. Ending each day with no money invested means never being fooled into thinking a company is worth a single cent. To a day trader, "investor" is a term of derision.

A market in which stocks were valueless had resulted in a breed of speculator who placed no value in stocks. Shares became tokens of less importance than poker chips in a game of chance, where the winnings went to the swift; those who could get in before the rush to buy and out before the rush to sell. This transition was often measured not in minutes or hours, but seconds.

The activities of the day trader bear more resemblance to those of a racetrack tout than a serious investor. Always looking for a hint of where the market will jump next, the day trader compulsively follows business news, buying in at the first mention of a dot com share on a major network, without even waiting to hear if the news is good. It doesn't matter anyway. Stocks have run on bad news and dropped on good news. You never can tell.

Day traders were the pump 'n' dump hustlers and the cynical gamblers of the new economy, but the profits they took had to come from somewhere. The ludicrously over-valued IPOs that were the mark of the dot com market were funded with cash poured in by ordinary people who had bought into the hype of the market, who believed there was money for nothing if only they were willing to reach in and grab it. Typically entering the market via online discount brokerage houses such as E*Trade and Schwab, the ordinary investor was easy prey for day trader sharks, who connected to the market via electronic trading networks that placed them directly in the market, rather than being at the mercy of slower, less reliable web interfaces and the relative sluggishness with which the brokerage houses were willing to execute orders.

The brokerage houses made their money not only from the ultra-low fees they charged, but also from skinning their clients. It has been claimed that the brokers always shorted the investors by accepting the investor's money, but not purchasing shares until the price had dropped below the value that the investor had paid, and pocketing the change. It was a lucrative scam, if the claims are true, and there was always another sucker waiting to be taken thanks to the advertising success of the online brokers.

Anyone who recalls the campaigns run by Schwab and E*Trade will have noticed that the common theme was not only of ordinary people hitting the big score, but also of the average man winning out over the savvy, business-suited marketeer. The message the brokerage houses peddled was that there was enough money for everyone, so long as they were willing to take a chance. Not only that, but for once they could beat the yuppie at his own game.

The ad campaigns were effective enough to ensure that hordes of ordinary people were eager to fork over their cash for whichever pie-in-the-sky stock had rolled across the business news last. These people were the primary victims of the dot com mania.

The collapse in the dot com stocks sucked over three trillion dollars out of the Nasdaq without producing a nickel of economic growth in the long run. That money didn't simply go "where the woodbine twineth." It vanished into the pockets of the day traders and dot com bandits who took Joe Sixpack for a ride yet again. From the South Seas bubble to the great depression to the junk bond market to the dot com crash, the story repeats itself: slick professional traders and brokerage houses get away with the loot, while the small investor gets stuck with the bill.

Traditionally, the villain of the bull market melodrama has been the conniving businessman, always one step ahead of the innocent investors who are just looking for their piece of the action. In the aftermath, it is those who fit this image that have taken the fall for the crash in the public consciousness. This time around we may see a change to the cycle.

The rise of the dot com stocks was associated not with bandits in three-piece suits, but with the geek entrepreneur. This association changed the way the geek was viewed by the media and the community. No longer was he the bespectacled nerd, intensely passionate about things which ordinary people found weird or boring. He was reborn as the hacker with the billion dollar idea. The popular story is that of the start-up founder building his business, making his pile and living a life of ease and wealth. The reality is not necessarily so rosy.

Despite the fact that geeks are as much victims of the dot com crash as investors, it may be that the geek is going to take the fall this time. The close association of the geek image to the dot com industry might lead the public to identify geeks with their lost retirement fund. Even if this fate is avoided, it seems unlikely that geeks will continue to enjoy the upmarket image that the new economy provided them. As the environment that gave geeks validation melts away, will the cool geek image outlive it?

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Poll
What did you do during the dot com bubble?
o Made millions from sales of stock from my start up. 0%
o Made hundreds of thousands working for a dot com. 3%
o Made millions in stock options working for a dot com, but ended up with nothing in cash. 6%
o Made a pile off the eBay float, retired at the age of 24. 0%
o Lost my life savings to dot com vultures. 2%
o Led a clean, guiltless life, well away from the dot com silliness. 59%
o Went out, got drunk, threw up, passed out, woke up in gutter, repeat for four years. 15%
o Stuck in Idaho, nothing to do. 12%

Votes: 146
Results | Other Polls

Related Links
o NetJ
o pump 'n' dump hustlers
o over-value d IPOs
o campaigns
o "where the woodbine twineth."
o The reality
o Also by cretin


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Fallout From the Dot Com Meltdown | 17 comments (13 topical, 4 editorial, 0 hidden)
inherent problem with speculative markets (4.07 / 13) (#1)
by Arkady on Sun May 06, 2001 at 01:44:25 PM EST

First, on the eitorial side, I really think you're header block is too big. In the two-column layout it's almost 4 inches high; in the Front Page's three-column layout I'd guess it'd be about 6 inches high, giving it complete domination of the page were it posted there.

On the topical side, it'd be good to mention that this sort of bubbling is inherent to speculative markets. When the only criterion controlling the price of stocks is the expectation of a future resale price, there's no link whatsoever to the actual company to which the stocks refer. This leads directly to such bubble behavior.

Also, the loosening of restrictions on IPO issuances was a heavy influence on the .com phenomena. If I remember correctly, the stage was mostly set in 1997 when the minimum time-to-IPO for new corporations was dropped from six to two years. Hence the explosion of IPOs in 1999, the first year these new companies could go public.

-robin

Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere Anarchy is loosed upon the world.


It also needs more definition (3.33 / 3) (#3)
by liberalmafia on Sun May 06, 2001 at 02:02:33 PM EST

It also takes way too long to get to its point, which seems to be in the last paragraph -- "Us geeks will take the fall again". Until then, it wanders and dawdles between seemingly unrelated topics until I started to mutter "Get to the point!"

It's very hard to say something new on this subject (though I *would* like to see some article about how the current fad for libertarianism contributed to the dot-com bubble). Unfortunately, this article doesn't say enough to justify its existence.

[ Parent ]

Athens stock exchange the same (3.00 / 2) (#2)
by pavlos on Sun May 06, 2001 at 01:58:28 PM EST

The Athens stock exchange recently went through a similar boom-and-bust cycle, with the bust coming shortly before the international dot.com bust. It showed the same symptooms as you are describing.

  • It was a new market. Athens had a stock exchange for decades but ordinary people did not invest until 2-3 years ago.
  • The whole stock exchange was greatly overvalued compared with the actual earning potential of the Greek companies.
  • Everyone and their uncle "invested" part of their savings, being convinced by the media that there was plenty of money for everyone.
  • When the crash came, casual and fund investors were in the red, whereas speculators who had exited quickly made a profit.

    It always amazes me when this happens. Is it really so hard to recognize overvalued things?

    Pavlos

  • people are idiots (2.60 / 5) (#5)
    by rebelcool on Sun May 06, 2001 at 02:34:51 PM EST

    just look at how many get themselves deep in credit card debt. Is it that hard to realize you have to pay your bills?

    COG. Build your own community. Free, easy, powerful. Demo site
    [ Parent ]

    credit card debt (3.66 / 6) (#8)
    by Delirium on Sun May 06, 2001 at 07:31:50 PM EST

    Exactly. Sane people treat their credit card as if it were a debit card (with the added bonus of giving you interest-free 30-day loans). Why the hell would you actually use it as credit? 18 interest? I'm sure even with some pretty shitty credit you could get at least closer to 10% from a bank. So if you need a loan, get a real loan; if you can't get one, don't spend money you don't have!

    What annoys me is that people somehow think it's the fault of credit cards that people get into debt, and give nonsensical advice like "don't get a credit card; you don't want to end up deep in debt." That advice is only necessary for the idiots who can't add, subtract, and figure out how much money they have. For sane people, getting a credit card is perfectly fine; all that's needed to not get in debt is to not spend money you don't have. Bah.

    [ Parent ]

    There's the games banks play (3.80 / 5) (#9)
    by kmself on Sun May 06, 2001 at 08:18:29 PM EST

    I've seen how credit-card banks stack the deck, with offers, short payment windows, rapidly changing lending terms, and the rest. For someone already struggling to make ends meet, it can be all to easy to start down the slide toward unrecoverable debts.

    My own experience -- a contracting stint at Providian, the sixth-largest credit card lender in the US, specializing in what the industry calls "marginal credit risks". The company was investigated by the San Francisco and California attorneys general, and at least one consumer-right legal firm. The company was fined over US$130 million for its actions. They're currently trying to play good corporate citizen by, among other things, underwriting the local NPR affiliate.

    They're scum. I've seen it.

    Yes, there are dump people on the planet, but there are also highly unethical businesses.

    --
    Karsten M. Self
    SCO -- backgrounder on Caldera/SCO vs IBM
    Support the EFF!!
    There is no K5 cabal.
    [ Parent ]

    and still.. (4.00 / 3) (#11)
    by rebelcool on Sun May 06, 2001 at 11:39:19 PM EST

    dont spend money you dont have. When I whip out the card, the reason is because I know i've got enough cash in the bank, but not in my wallet at that moment in time.

    The Credit Card banks dont make it easy on you, thats for sure. But it IS easy to stay *out* of debt in the first place by using simple common sense.

    COG. Build your own community. Free, easy, powerful. Demo site
    [ Parent ]

    yes and no (5.00 / 2) (#14)
    by Anonymous 242 on Mon May 07, 2001 at 03:28:26 PM EST

    But it IS easy to stay *out* of debt in the first place by using simple common sense.
    This statement is true in a robust economy. If jobs that pay adequately are in abundance and wages rise faster than inflation, then using simple common sense is more than enough to keep one from sinking into debt over one's head.

    If the job market is tight (from the employee's perspective) and inflation is rising while wages stagnate, it is quite possible that common sense is not enough to keep the average person from accumulating debt faster than it can be paid off.

    Just out of curiosity, how old are you? Were you fortunate enough to be in the midst of raising a family when the supply side economics of the Reagan administration flowered into a recession during the Bush administration? Were you fortunate enough to have mouths to feed with the Arab oil crisis combined with the bad management of the Carter administration triggered the unprecedented occasion of stagflation? How about all those common sense folks that had money in the bank that disappeared over night setting off the Great Depression?

    Consider my grandfather's generation. Common sense told the average employee to depend for retirement on a combination of a pension and social security. By the time the eighties and nineties rolled around, companies began laying off workers in just prior to becoming vested in their pensions and the future of social security has become increasingly uncertain. All of a sudden, common sense doesn't look like it always pans out.

    And then there is the question of education. Very few people, including those in the middle and upper class, are properly educated about how money works. Given the starting point of almost total ignorance, I think that it takes a good deal more than common sense to ward off the increasingly inventive and immoral behavior of a good deal of financial companies.

    In the end, economic systems don't really care if someone has common sense or not. While, I do agree that in general, common sense goes quite a long way toward keeping people in comfortable finanical standing, it is quite falacious to state that common sense is a completely effective prophalactic against abject poverty or unbearable amounts of debt.

    [ Parent ]

    Common sense, populations, and individuals (none / 0) (#16)
    by error 404 on Thu May 10, 2001 at 03:11:46 PM EST

    Economic systems are about populations. Common sense tends to affect an individual's position in a population, but doesn't do much for the population. Everybody can't be in the top %10.

    As an illustration, a certain company used to have quarterly off-site meetings that every employee was supposed to attend. It was very common for there not to be enough chairs for everybody. Advising people to be early worked as an individual solution, but as a company solution, all that did was cause more people to leave work for the meeting a few minutes earlier. A loss of productivity that did nothing to address the chair shortage.


    ..................................
    Electrical banana is bound to be the very next phase
    - Donovan

    [ Parent ]

    Confidence man (4.00 / 3) (#6)
    by slaytanic killer on Sun May 06, 2001 at 02:36:21 PM EST

    Is it really so hard to recognize overvalued things?
    "Con-man" comes from "confidence man." Humans are set up to want to believe in things, rather than really thinking. The confidence man preys on this weakness in people. Not everyone has this weakness to a large degree, but those who do complain loudly.

    But when all that's said and done, it was still an adventure.

    [ Parent ]
    investors, geeks (4.25 / 8) (#7)
    by heighting on Sun May 06, 2001 at 05:52:21 PM EST

    As I understand, in most dot com IPOs, the opening price is often much higher than the offering price, which means that individual investors, day traders included, usually do not profit significantly from it. The parties who *did* benefit are usually favoured institutional clients of the underwriting investment bank, who were allowed to buy the stock at the offer price, and who usually flipped their stocks immediately or within a week of the IPO.

    Second, the media, and hence the public, has placed most of the blame on VCs and the analysts who hyped the stocks, not entrepreneurs. Also, the term 'geek' has always had a negative connotation to it, so I'm not sure why you think there was a 'cool image' to outlive in the first place.

    An interesting "explanation" (4.80 / 5) (#15)
    by rabbit on Wed May 09, 2001 at 07:13:06 AM EST

    (reading this, I now realize that the direction it went is slightly off topic, but that's how it goes, as they say in the hood, "my bad")

    I used to work for a .com. When the proverbial shite hit the proverbial fan, about 10 months ago, the accountants/economists at the company that I worked for at the time made an effort to explain the situation. Based on their explanation (which I will get to in a second) the .com bust was not unexpected. It hit sooner than expected, but was expected the whole time.

    Get that? The only surprise was timing, not the "event" itself.

    The explantation went something like this:

    With each major new technology, there is always an initial burst of growth. This initial burst of growth is partly fueled by Venture Capitalists. VC firms have been around *forever*. The VCs see a new technology and in effort to A. make a bunch of money, and B. encourage the tech to mature, they throw money at it like it's going out of style. This happened with plane, trains, automobiles, televisions, radio, print, everything.

    As was said, above, they knew most of this crap was doomed to fail. But they're VCs, that's their job. They fund anything and everything. Most of it craps out, and rightly so. But a couple of them will still be around, and those will make the VCs fistfuls of cash.

    At some point, the market in question gets sort of over-saturated and does what they call a "stabilizing adjustment". What this means to the average joe, is that it crashes. In the short term everything falls apart and hari-kari ensues. In the long term, only those resultant technologies that are actually worth anything remain, because even after the crash, the technolgies that have proven themselves profitable and useful in the long run continue to get funding until they fully mature.

    The reason this whole mess took everyone by surprise is that they forget to convert to "internet time", which as we all know is vastly accelerated. The drop in available (or willing) VC money that occured 10 months ago happened about a year earlier than expected. By all estimations, it should have happened right about now, instead. If it had happened when it was *expected* to happen, I suspect that a lot of people would have handled it rather more gracefully. The main reason that so many people were laid off (ahem...fired) with almost no-warning is because the whole thing happened an entire year too early, and money just spontaneously combusted, taking many people's paychecks with it.

    oops.

    The interesting thing about all this, I think, is that because of the nature of the internet, and the nature of the companies being funded by VC firms, everyone is taking it all way too hard. Everyone is losing their catered dinners, and fridges full of Mt.Dew, and the dogs at work, and the late nite Q3A tournaments between the "coders" and "product development". As well as having traded a whole bunch of hours for zilch payoff. We all knew going into this that it could blow up in our faces. Now that it did, we all sit around and whine about it on Netslaves.

    We gambled; we lost. Now we look for new jobs. Get over it already. What's that? You blew all your money on tech stocks? Your fault. Nobody held a gun to your head. What's that? You have no marketable skills other than some vague "product development" work you did a failed internet company? Who's fault is that? Yours. What's that? You spent your signing bonus on a 1943 Porche replica, instead of banking it? Dumbass.

    If you don't understand that the odds are against you, you either A) shouldn't be gambling or B) deserve to lose your money/work/time/catered meals. Take some responsibility folks. This is the big time, not some dollar blackjack table at a casino in Windsor.

    To get back on topic: I'm not sure that the geeks are going to be the fall guys here. I interact with a pretty wide range of people on a day to day basis, and while many of them will ask me what the deal is, or how the .com thing is affecting my business, I don't think it's even occured to any of them that by being an ex .commer that I might be the bad guy. I think "everyone" "knows" that the "suits" are the bad guys here. Well, the suits and those two e-tards that founded razorfish.

    And just for the record: I was hit just as hard as anyone else by this. My former .com fired me without warning and still owes me a fat wad of cash which I don't suppose I'll ever see.

    I'm done, you can flame me now.

    --rabbit
    -- I have desires that are not in accord with the status quo.
    Bah! 20/20 hindsight (none / 0) (#17)
    by Alhazred on Fri May 11, 2001 at 02:43:47 PM EST

    Your all the same people that were rushing out there shouting to the world that this was a revolution and you were all going to be billionaires in 5 years...

    Now of course you all expected this to happen and your all geniuses!

    Right....

    Well, some of you guys might be, but guess what? I put my money in blue chip stocks and a few growth opportunities. In the last couple years I made a good bit of money in the market, and guess what? I lost diddly squat. Bet I'm ahead of you all. Heck I even ran my own Internet company, was I dumb enough to invest my own cash in it? No! Duh! Of course not! :o))))

    ALL the people that dumped money into .coms were e-tards! Now stop trying to look smart!
    That is not dead which may eternal lie And with strange aeons death itself may die.
    Fallout From the Dot Com Meltdown | 17 comments (13 topical, 4 editorial, 0 hidden)
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