All That Is Solid Melts Into Air
Conventional wisdom holds that the Internet bubble popped on Friday, April 14, 2000, 88 years to the day after the Titanic disaster and when a decline in technology stocks drove the Dow Jones industrial average down 617.78 points, its most precipitous plunge ever. It can be argued, however, that the Internet bubble wafted on at least a year longer in the shape of a company called Enron. Enron may not have a dot after its name, but it was the embodiment of the “new economy” company that dot-coms aspired to be in the ‘90s.
Enron was able to flourish only because dot-com companies in the ‘90s brought a peculiar set of notions to the American mainstream: that Wall Street analysts could objectively evaluate companies they had stakes in; that people would embrace new technologies simply because they were cool; and that “nontraditional metrics,” which evaluated companies based on fuzzy new measures like buzz, brand and “mind share,” was more revealing than old-fashioned measures like assets, dividends and growth rates. The mystery of Enron--how it could have come to be valued at more than $60 billion despite its paucity of assets and good ideas--becomes less perplexing when you read this tale of companies that came before it like Price- line.Com, which was valued at $10 billion, more than United Airlines, Continental Airlines and Northwest Airlines combined, even though it had no valuable terminals, no landing slots and no brand names, not to mention no airplanes. Lucid and informed, “Dot.Con” is New Yorker writer John Cassidy’s attempt to explain why so much hard capital evaporated into hot air.
Many authors are now flaunting their razor-sharp hindsight about ‘90s profligacy, but Cassidy manages to find at least a few eternal verities behind the great financial folly. The central problem, Cassidy writes, was that investors failed to realize that the Internet’s patchwork of cables, computers and promises was not a “revolutionary new business model” but merely “a tool that companies can use to build their business if they can combine it with distinctive products.”
One charm of the book is that, its title notwithstanding, Cassidy doesn’t buy into banal stereotypes of Machiavellian bigwigs preying upon innocent Americans. He skewers not only the media and Wall Street analysts for promoting dot-coms much as TV networks pitch epic miniseries, but also armchair investors for having the hubris to think they could be players in the drama. Cassidy holds three groups particularly accountable:
* Journalists and Wall Street analysts, who failed to ask basic questions that would have helped investors distinguish between brilliant discoveries (such as Mosaic, the Web browser that turned a green-and-black computer messaging system into a colorful, human tapestry) and fantastically stupid schemes (such as Jim Clark’s Healtheon, the company that was valued at more than $2 billion on its first day of trading even though it had no clue of how to accomplish its goal of “fixing the U.S. health care system.”) Healtheon’s only business plan was a “magic diamond” that showed computers somehow connecting payers and doctors to providers and consumers.
* Federal Reserve Chairman Alan Greenspan, who initially hyped the bubble by glibly concluding that “the computer, satellites and the joining of laser and fiber-optic technologies” had “fostered an enormous new capacity to capture, analyze and disseminate information.” Though Greenspan came to believe that most Internet companies were absurdly overvalued, Cassidy writes, he failed to exercise his “legal, moral and intellectual authority to prick the bubble ... until too late.”
* The American people, whose “greed and gullibility” puffed the most hot air of all into the Internet bubble.
Last year, Cassidy’s editor David Hirshey boasted that “Dot.Con” would “demystify [the] extraordinary social and cultural phenomenon” of the Internet with all the anthropological depth of “The Great Crash,” John Kenneth Galbraith’s 1955 analysis of how rituals and assumptions that America up for the 1929 stock market crash. Even editors, it seems, are susceptible to the temptations of hot air, for Cassidy, despite his pretension of rising above journalism into history, does not achieve the sharp critical distance that Galbraith showed.
Through much of the book, Cassidy, an Oxford-trained former business editor of the Sunday Times of London, comes across as an elitist, broadly dismissing Americans by analogizing them to H.L. Mencken’s “sordid, money-grubbing people” or to the “young Rattles and unthinking Fools,” whom 18th century poet Edward Ward sneered upon for failing to “follow Reason’s Rules.”
Galbraith was an elitist too, sympathizing with the sentiment of his contemporary, economist John Maynard Keynes, who once wrote that “the social object of skilled investment should be to defeat the dark forces of time and ignorance, which envelope our future.” But Galbraith at least acknowledged that his meritocratic ideas would be a hard sell in populist America.
Cassidy, by contrast, asserts imperiously that “it is up to journalists and government officials to try to maintain sanity” but does not acknowledge the cultural impediments blocking anyone who tries to uphold that ideal. Many journalists in the ‘90s, for instance, believed it was their job to reflect popular enthusiasms, not shoot them down.
Similarly, Cassidy fails to wrestle with the difficulty of Greenspan’s dilemma. He was, and still is, a disciple of Ayn Rand: a fervent believer that capitalism works best when capitalists are free to reinvent themselves. It’s too glib to blame a libertarian like Greenspan for failing to impose his own classical yardstick for valuing a company--does it manufacture a needed good more cheaply than its competitor?--on a country that has decided to pick up new yardsticks.
Both conservative thinkers like Greenspan and liberal ones like George Soros agree that it’s no mean feat to distinguish the “real economy” from the perceived one. Value is as much a social construct as it is a financial one. As Keynes put it, investment is like a game of musical chairs: What matters is not the inherent value of your stock but whether you are left standing when the music stops.
Instead of grappling with the hard question of how America’s meritocrats should have gone about exposing and correcting popular misconceptions, Cassidy simply asserts, in rather abrupt and sudden passages that introduce and conclude the book, that the whole dot-com bubble had been merely a “historic aberration”: a bout of “technological utopianism” that ended when Americans became sober and sane after the Sept. 11 terrorist attacks.
“After several years indulging itself in fanciful thoughts about the future,” Cassidy concludes, “America had gotten serious, leaving behind the trivial pursuits of a speculative bubble.”
My guess is that Cassidy really doesn’t believe that Sept. 11 changed America so fundamentally but that he is putting his Oxbridge elitism aside so he can carry out his Fleet Street newspaperman’s obligation to find a news peg that makes his subject more topical. Like Greenspan, or the business journalists of the ‘90s, it seems, Cassidy at some level knows that his job is to listen carefully and not take a seat until the music stops.
