Silicon crash

Posted: Sunday, April 16, 2000

The following editorial appeared in Saturday's edition of The Washington Post:

Even the fieriest denunciations of capitalism from the street protesters in Washington cannot match capitalism's spontaneous combustion Friday in New York. Spooked by the news that inflation was higher than expected, the mainly old-economy stocks in the Dow Jones Industrial Average fell 5.6 percent; and the technology-heavy Nasdaq index tumbled 9.7 percent. The Nasdaq's collapse was especially remarkable, since the index had already lost a quarter of its value since its peak on March 10.

When the financial history books are written, a lot of attention will be focused on the past extraordinary months. The strongest bull market in Nasdaq history has been succeeded by its steepest ever fall. What's more, the market is said recently to have been seized by a mysterious short-term volatility: Stocks zip up and down frenetically, apparently without any new information becoming available to justify a change in their value.

For the moment, the causes of the market's descent remain as puzzling as those of the preceding bubble. Motorola's recent announcement that cellular phone earnings would be disappointing is said to have shaken some investors. But why were Motorola's modest profits more alarming than the total absence of profits earlier reported by countless whizz-com companies? Equally, the announcement of rising consumer price inflation seems a thin reason for Friday's selloff. Much of the extra inflation was related to oil price increases, and these prices are already coming down.

If stocks continue to head downward, start-up companies will find it hard to raise money, and many will go bust. The impact could be painful beyond Wall Street, and beyond Silicon Valley too. Some workers will lose jobs, others will lose savings that they had invested in the market. A deceleration lately has seemed inevitable. The economy has been growing roughly twice as fast as most experts believe sustainable; either a sustained bear market would put the brakes on, or the Federal Reserve would endeavor to do so. A question, in either case, is whether the system can avoid excessive braking.

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