The document discusses the economic downturn in the late 1990s and early 2000s, particularly the dot-com bubble bursting. It notes that many internet companies that had raised significant funding saw their stock prices collapse. While the rapid growth of the tech sector had boosted productivity and the economy, non-rational behavior drove parts of this process and economic models failed to capture downturns well.

1. “OUR ECONOMIC MODELS HAVE NEVER BEEN
PARTICULARLY SUCCESSFUL IN CAPTURING A
PROCESS DRIVEN IN LARGE PART BY NON
RATIONAL BEHAVIOR.”
LET’S TALK ABOUT FEELINGS
A translation of the Testimony of Chairman Alan Greenspan
February 28, 2001
MGMT 468 SPRING 2011
SUMMERS MCKAY

2. THE WORLD IN Q3 & Q4 2000, Q1 2001
 Pets.com – A puppet closes it‟s doors
 Feb 2000 - $11/share
 Nov 6, 2001 - $.19/share
 eToys.com raised $166M in May of 1999.
 Oct 1999 - $84/share
 Feb 2001 - .09/ share
 Disney is in the game with Go.com but takes a $790M
write off in Jan 2001
 Webvan continues to expand operations!
 Digital Impact, an email marketing company hires
Project Manager, Summers McKay, September 2000
 Clients include – Webvan.com Bevmo.com Pets.com and
Overstock.com

3. CRAZY MAKING GROWTH ISN‟T A BAD THING
 The past decade has been extraordinary for the
American economy and monetary policy. The
synergies of key technologies markedly elevated
prospective rates of return on high-tech investments,
led to a surge in business capital spending and
significantly increased the underlying growth rate of
productivity.
 Translation: We had a great GOLD RUSH. We Got
Some Gold from our Rich Orchard of Opportunity!

4. BUT
 “Death is a normal consequence of life.”
 Ed Leamer, The Life Cycle of US Economic Expansions, March 2001
 The problem is, we don‟t know how to die
gracefully, because fear of death and the confusion
of loss are the most powerful of all forces.
 Summers McKay, Final Presentation MGMT 468, Spring 2011

5. THE SKY IS FALLING!

6. SHOULD WE HAVE SEEN THIS COMING?
Leamer: Life Cycles of US Expansions

7. WHAT ELSE DO WE SEE?
 Changes in stock market wealth are an important
determinant in shifts in consumer spending.
 While corporate managers appear to maintain long
term optimism, consumer spending on durables is
declining.
 Increase in information exchange and awareness of
these market forces seem to be making consumers
and lenders more risk averse and likely to withdraw
from action.
 We forecast a retrenchment following the excesses
built up in 1999 and early 2000.

8. SHOULD WE HAVE SEEN THIS COMING?
Leamer: Life Cycles of US Expansions

9. SHOULD WE HAVE SEEN THIS COMING?
Leamer: Life Cycles of US Expansions

10. SHOULD WE HAVE SEEN THIS COMING?
Leamer: Life Cycles of US Expansions

11. SO WHAT CAN WE LEARN AND WHERE DO
WE GO?
 Logic now might indicate yes, but our behavior
simply hasn‟t been logical.
 Are Gold Rush „Bubbles‟ Bad?
 Information technology has catapulted;
productivity, inventory
management, communications, and perhaps global
trade.
 And you can place an order online at bevmo.com and
pick it up on your way home already paid for and
packaged up!

12. OF COURSE THERE ARE STILL TECHNOLOGY SKEPTICS
 “An email declaration of „I love you‟ is more likely
to be a virus than a credible promise of good
things to follow.”
 Edward E. Leamer & Michale Storper: The Economic Geography of
The Internet Age, August 2001
A little foreshadowing……
 Cupid.com has 23 million members, in 39
countries and generates more that £4 million a
month in revenue.