What Caused the Dot Com Bubble: 1: Bubble and Deregulation

In 2010, the financial-regulation reform bill has been passed. This made us to rethink the role that financial regulation has played in the formation of dot com bubble.

 

After the great depression, the US economy has developed very well for over 40 years. At that time, the financial regulation was quite strict.

(The Great Depression)

 

After 1970s, the US economy experienced two times of oil crisis, which lead to the high inflation for years. For the purpose of promoting the economy, Reagan-administration gradually deregulated the financial market and therefore it helped the economy to fast develop. Objectively speaking, the financial innovation of the US more or less benefited from the deregulation of that time. But this made people more likely to speculate in the stock market and housing market.

 

In the 1990s, the deregulation has been deepening. And thus from some point of view contributed to the dot com bubble. At that time, investment bank market the shares that they think are of no future. The analysts boast of their outstanding achievement. Many of the stocks they thought to be quite promising are turned out to be not worth a cent. They are duplicity and deceive the investors driven by their private interest. And therefore, the bubble formed. To say the least, the deregulation of the financial market account for the dot com bubble.

 (Greenspan and Ayn Rand)

The financial crisis is also a painful hangover of lacking necessary regulation. The US economy should learn more from an introspection of the dot com bubble but they didn’t. That is partly because the pain from the dot com bubble has been concealed by the stimulation of the aggressive monetary policy.

 

 

 

(The change of the attitude of regulation can also provide a clue about the change of the capital mobility and incidence of banking crisis.)

From next blog, I will talk about the second reason for the dot com bubble-------The technology revolution.