The Market Bubble

Jane Galt discusses the market bubble and suggests that evolution is to blame (at least in part).

But if we are programmed that way, why did we have a bubble in 1998 but not in 1980 or 1955?
It's hard to remember today just how new wide-spread individual investing is. Thirty years ago middle class Americans didn't invest, they put money in the bank. (See Nocera, Piece of the Action: How the Middle Class Joined the Money Class for the best discussion of this transformation.) A certain amount of naivety is to be expected with new investors.

What is astonishing about 1998-2000 is that this naivety was exploited, not mitigated by those who should have known better.

The airwaves were awash with irresponsible advertising that asserted that the average Joe could get rich fast by trading online.

Business media acted more like cheerleaders than watchdogs. CNBC, for example, was happy to provide a platform for money managers and "stock analysts" to hype the market and specific investments.

We now know that those "recommendations" were rife with conflicts of interest. Yet, business journalists were uninterested in pursuing those stories. It was a classic case of reporters being held hostage by their sources.

It is sad that investors were better off reading the business section of the liberal New York Times than they were listening to CNBC or reading Fortune or Red Herring.

Many journalists fell for the siren call of revolution. The Internet promised to be for business what Port Huron and Woodstock were for politics and society in the 1960s and 1970s. Anything was possible because the Net was new, revolutionary, and the stodgy, old, straight, white guys just didn't get it.

Given what we know now, the bubble was also a failure of regulation and government leadership. Yet no one seems interested in the political dimension. We have Clinton facing impeachment and his best shot at survival is a booming economy. Did this make his administration hesitant to act for fear that a market drop would hurt the boss's job approval numbers? Were they thinking about what would happen to Gore in 2000 if they moved aggressively in 1999? Two sectors where Clinton had substantial business support were Silicon Valley (Apple, Oracle, etc.) and investment banking. These were also the areas where the bubble's excesses were most obvious. Coincidence?