What do you think we've learned, or failed to learn, about the Internet's
real importance? And what might this suggest about the true cost of the
Internet bubble, not just in economic terms, but in social and even political
terms? That is, what was the "opportunity cost," so to speak, of lavishing so
much money, energy, and media attention on the Net economy?
The Internet is a very important invention that will have important
consequences. But the extent of the consequences is very hard to quantify. The
quantitative importance of the Internet will never be fully known, even after
another century has gone by.
By analogy, what was the real importance of the invention of the railroad for
the 19th-century economy? There was a famous debate on that topic between Prof.
Robert Fogel of the University of Chicago and Prof. Albert Fishlow of UC
Berkeley in the 1960s. They tried to figure out what the relative costs of
other modes of transportation were, what canals would have been built if there
had been no railroads, and so on. Fogel concluded that the railroad raised
gross national product by less than 5 percent total over the century, while
Fishlow thought it raised GNP by more than 15 percent. No one has ever resolved
the discrepancy between their two numbers. The repercussions of any such major
technological advance are so manifold, and we can never know what alternative
technology would have invented around the problems that the railroad solved.
The same will be true of the Internet. The repercussions of the Internet will
be complex, involving whole new lines of business, even businesses that have no
obvious connection to the Internet. When the information infrastructure
changes, all manner of new businesses become feasible and many old businesses
Since Sept. 11, concern about the economy has only deepened. But putting
short-term predictions aside, as you look back over the past year or 18 months,
what connection do you see between the dotcom crash and the current recession?
The whole story of the Internet economy has been eclipsed by Sept. 11, but what
shape do you think the economy would be in today if the events of Sept. 11 had
never taken place? In other words, in terms of the economy, what's the more
I think that in the long run we will decide that the end of irrational
exuberance was a more significant event for the economy than was September
September 11, 2001, was a unique event in U.S. history. We have never seen such
an attack before. Immediately after the attack, there was great anxiety, since
there was fear of an invisible enemy that might have increasingly diabolical
plots against us. The anthrax scare heightened that, when we believed it was
from the same source. But, I think that this anxiety has been very short-lived.
The remarkable success of our war efforts have allayed most fears. As long as
there are not some flamboyant terrorist attacks, people will see little reason
from this not to spend.
The end of irrational exuberance is more likely to be significant now, because
its reasons for curtailing spending are still with us, and because the lack of
exuberance is shared all over the world. During the exuberance, people thought
there was every good reason to spend now -- and to take big risks based on very
insubstantial reasons to expect future reward. That feeling will be gone for a
What about current stock valuations versus what they were before the bull
market ended? One of the major points you make in Irrational Exuberance
is that price-earnings ratios in the late 1990s were historically way out of
line. A year and a half after Nasdaq peaked, what's the story on price-earnings
The conventionally defined price-earnings ratio on the Standard & Poor 500
recently hit 41.4. This is not only a record high, it is stratospheric. In
1929, when the previous record was set, the ratio only reached half as high.
Maybe the market isn't quite so much more overpriced as this ratio suggests.
There are some risks in trusting any comparison with the past, as the
definition of earnings has evolved over time, and recent earnings have been
affected by some aggressive write-offs. But, I think that the evidence is
pretty strong that the overall market is still very overpriced.
Is it possible that the bubble will reinflate once the economy starts
This is a very different, and difficult, question. Have people really changed
their psychology in fundamental ways? There isn't a clear enough theory of
market psychology for us to say whether they have or have not. Survey evidence
on investor psychology haven't shown any unambiguous picture. But, my guess is
that, since the irrational exuberance of the late 1990s was such an
extraordinary event in our history, we should not expect that to repeat again
Do you think that the charges of IPO abuses, coupled with the very public
outcry over analyst conflicts of interest, have left a lasting stain on Wall
Street's record? Has the public's trust in Wall Street has been significantly
shaken? Should these IPO investigations -- and the 1,000-plus law suits
currently pending, involving something like 263 IPOs -- be seen as the true
legacy of these years on Wall Street, as much as the bubble itself?
I don't think that these abuses were as bad as the ones of the 1920s. After the
1929 crash, public preoccupation of those abuses led to some changes. The
Investment Act of 1940 made fundamental changes. Mutual funds, which differ
from the investment trusts of the 1920s in that they were not secretive and
treated all investors equally, proliferated.
We've already seen some government reaction to the abuses of the 1990s from the
SEC. Notably, Regulation FD, instituted in 2000, made for a more level playing
field, and reduced the power of analysts. I think that changes like these can
restore public confidence.
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