• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

The dotcom bubble and the stock market fall in 2000-2001

Extracts from this document...

Introduction

"The dotcom bubble and the stock market fall in 2000-2001" OUTLINE 1. Introduction To introduce the topic, I'm going to address the importance of examining this crisis in detail and describe in a nutshell what actually happened. 2. Main body * The reasons of the dotcom bubble burst * Theoretical explanation of what happens during the financial bubble * What are the consequences of this particular event? 3. Conclusion Summary of the main points covered in my essay. How did the dotcom bubble burst contribute to the economic crisis of the 2008? Could we expect the similar crisis and how can it be prevented? What are the lessons that should have been learned from the dotcom crisis? INTRODUCTION When the global financial crisis occurred in 2008, both experts and general public started heated discussion as everyone was eager to identify the reasons for such a calamity. It is clear that nothing happens with no reason at all. Let's consider the famous speech1 of Ben Bernanke, who is the Chairman of the Federal Reserve System. In that testimony he tried to explain the causes of the recent financial and economic crisis to the Financial Crisis Inquiry Commission, highlighting the vulnerabilities in different sectors of economics. The idea of inadequate risk-measurement that he focused on is very important for us, as this particular issue makes the recent crisis akin to the dotcom bubble we are about to examine in detail. ...read more.

Middle

Consequently the rise happens responding to the high demand for stock and many companies thus become grossly overvalued. When the bubble "bursts", the share prices fall dramatically, and many companies are forced to leave the business. In order to be more precise, we can name five stages of any financial bubble5: First. Displacement. When people, especially investors, get enamored by a new paradigm, such as an innovative new technology or dotcom companies, as in our case, displacement occurs. That is the first stage of a financial bubble. Second. Boom. At this stage prices rise slowly at first, following a displacement, but then they gain momentum. More and more participants enter the market. All of them are determined to get prosperous as soon as possible. In case of dotcoms, a huge amount of small companies appeared on the market. The low interest rates in 1998-99 helped to increase the start-up capital amounts. Not all of them possessed innovative ideas, but they were sure that in the wave of e-companies they must succeed. No wonder they all had the same business plan of monopolizing their respective sectors through network effects. However it was clear that all of them wouldn't become successful as the competition was tough. For many of them the "get big fast" plan would fail. During this phase, investors become even more enamored by the asset, considering it once-in-a-lifetime opportunity that increases speculation even more. ...read more.

Conclusion

The financial and economic crisis of 2008 could have been predicted, if everyone was more prudent and learned a lesson from the 2000 dotcom case. In conclusion, I'd like to address the issue of a new Internet crisis that is predicted by some economists. Nowadays World Web companies place their stock at unbelievably high prices. Can a successful Internet project cost more than a huge transnational oil company? The common sense says definitely no, but investors have their own specific point of view. For example, the shares of Groupon, a famous discount service, we evaluated at $12,7 trillions, despite the company's loss of $400 trillions the previous year and gross debt equal to $420 millions. This estimation is not reasonable and very far from reality. Meanwhile, the expected IPO of social network Facebook is evaluated at $100 trillions. It can be the beginning of the Dotcom Crisis 2.0. On the other hand investors are optimistic about e-companies, as they survived the recent global crisis, unlike huge interconnected firms in other fields, such as financial, machinery and so on. However, if the case of Groupon is not unique (which is so, judging by the investors' optimistic mood) the crisis can occur once again. The most important thing in preventing the possible debacle is being prudent. Investors shouldn't be too optimistic and should be sensible when acquiring assets. PR and advertising can be astonishing, however being reasonable means evaluating the real business indicators to make rational decisions. Risk-management is the field that shouldn't be ignored if we want to avoid new crises. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our University Degree Applied Economics section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related University Degree Applied Economics essays

  1. Economic analysis and PESTLE for a London hotel and restaurant.

    infrastructure to support underperforming properties as the larger chain does and because of this inflation rate has gone higher which has affected the spending power of the people. www.bbc.co.uk Credit crunch has also affected our organization as the room rate has gone down by approximately 30% as spending power of

  2. Executive Summary Is there a possibility of social choice? ...

    However, Sen fails in his attempt to present a persuasive falsification of Arrow's theorem. Although, Sen may correctly stresses the centrality of informational broadening for resolving the impossibility in social choice, he does not succeed in locating any objective measure of deprivation or welfare which would allow a solid comparison between individuals - the key element in his suggested approach.

  1. Executive Summary What can economics learn from social science? ...

    The economist suggests 30% for each of them. However, Layard's approach - what he calls the Third Way - goes beyond economic measures. By developing his thoughts further, Layard widens the conception of happiness and defines other factors such as genes, experience and situation which affect happiness and should therefore be considered by evaluating different policy options.

  2. Economics Questions on Entrepreneurs, Equilibrium Pricing. Markets and the Labour Supply Curve.

    their business are more likely to cause the business to grow faster than small business without modern technological tools. Unfavourable economic conditions - In this matter it is important to notice that most of these economic factors are hard to deal with since they are triggered by many outside factors.

  1. Economics- market failure

    So just why do the government have to intervene? Continuing the topic of externalities, undesirable negative effects incurred through production must be regulated. Think of a factory who produces toxic waste as a by-product of what they are producing, if there were no laws to regulate the disposal of this waste, then the companies would not do this themselves as it would lower their profits.

  2. Identifying Individual Preferences in the Airline Industry

    So far, it has assumed that people?s demands for airplane ticket are individualized. That enables us to obtain the market demand curve simply by summing individuals? demands (Kris, 2007). In real-life, however, one person?s demand always depends on other people?s demand.

  1. Climate Change And Economic Policy. An Australian Perspective

    This in its simplicity is a Pigovian Tax, which is used to deter consumption/production of a good or service that causes the negative externality. Simultaneously the Indirect tax signals the taxed firms that they should spend investment capital on ways to lower their output of CO2 emissions (Carrie 2011).

  2. Demand Estimation of Indian Tractor industry

    Tractor market in India is about Rs6000 crore. On an average around 400000 tractors are produced and their sale is 260000. Key features related to Indian Tractor Industry: ________________ 1. One third of world?s tractor production is in India. 2. Total turnover 12,000 Crores. 3. Total investment 9,000 Crores 4. Employment 32,000 people directly, 1, 60,000 people indirectly.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work