Dotcom Bubble Case Study

Before we can begin, we must ask ourselves two major questions about the Dot com bubble;
What caused it to begin?
What caused it to end?
We know that an economic bubble exists when the price of an asset that may be exchanged in an entrenched market first rockets then falls over a sustainable period. Once the boom begins many investors see this as an opportunity for high levels of return. This is what happened when the in 1997 when we first see a spike in economic activity. This spike in economic activity occurred due to the equity value rapidly rising due to growth in the internet sector and related fields. A combination of increases in; market confidence and stock prices would turn future profits, stock speculation and venture capital funds into an environment in which investors would overlook proven metric in favour of placing confidence on technological advancements. Evidence of the rapid growth

No one could have predicted what was about to happen next: 9/11. After this attach, the US market went into limbo. The massive shock caused by 9/11 shifted the aggregate demand to the left and exposed the US economy to a very hard landing. On the day of 9/11, the fed, began a series of cuts to the interest rates. This was to shore up confidence and flood the economy with liquidity. This was also the main influence to decrease the fund rate to 1.75% by the end of 2001. However, 9/11 was followed by a series of confidence battering shocks which slammed the economy (the scandal of Enron, the space shuttle Columbia disaster, the war in Iraq, hurricane Katrina). To counter each of these shocks, the Fed were forced to lower interest rates even more. By July 2003, after thirteen cuts, Federal Funds rates had dropped as low as 1% (Farrokh