As the politicians are busy deregulating the financial sector, the dotcom bubble (touted as historical proportion at the time) was forming throughout the mid-90's (perhaps one can date the beginning with the NASDAQ listingo of Netscape) and reach a fever pitch in Year 2000.
Then it burst. The NASDAQ index plunged from its height of 5,000 level (reached in first quarter of 2000) to below 2,000 points within a year. Events that took place subsequently, though each deserves an Act of its own, happened too quickly that a montage in bullet points might be best employed in laying them out:
1. The trouble at Enron that brought itself to bankrupcy (filed for Chapter 11 in July 2001) and also led to the collapse of its external auditors, Arthur Anderson;
2. Conflict-of-interest scandals within the investment banks and stock-broking houses. Among which are those involving Henry Blodget, an Wall Street analyst who was recommending Hi-tech stocks to clients while privately rubbishing the same stocks, and Frank Quattrone, an investment banker who was allegedly allocating IPO stocks to his clients or prospective clients as favours in exchange for business engagements.
3. The September 11 Attack that depressed the stock markets further and ensured a prolong U.S. recession that began in March 2001, as later confirmed by the National Bureau of Economic Research.
4. The full weight of the events above trigger further corporate collapse and, along with the downfalls, more corporate scandals. The more prominant ones are:
Global Crossing Ltd (filed for Chapter 11 in January 2002);
Worldcom (filed for Chapter 11 in July 2002);
Tyco International (recorded US$9 billion losses in Fiscal Year 2002).
5. The Outbreak of SARS epidemic in November 2002 further depressed economic activity in Asia.
The confluence of events in Act 3 led to a notion that the global financial markets were collapsing and world economy is slipping into a severe recession. Additionally, manufactured goods coming out of China at ever decreasing prices was driving home the point that had there not been any intervention, not only was the world entering a recession, it would be coupled with deflation. It was further argued that deflation, once fully entrench, is even more difficult to get out of using monetary policy.
To slay the beast with dual heads (recession and deflation), US Federal Reserve promptly slashed interest rate at historical pace and kept real interest rate at near zero level for a long period of time. The rate was cut from 6.5% at end of 2000 to 2% by the end of 2001. By July 2003, it was already at (then) historical low of 1%. It was kept at that level for close to one year before the rate was slowly brought up from middle of 2004 to above 2% in beginning of 2005.
Reflecting on historical inflation data of the 3 years between 2002 and 2004 collected monthly, US inflation has fluctuated between 1.07% and 3.73%. Over the same period, Fed Fund Rate was managed within 1.0% and 1.75%. i.e. real interest rate during the 3 years was mostly in the negative region.
Not missing out the opportunities to push for his political agenda and win votes, President Bush launched two major tax-cut packages in 2001 and 2003.
Then it burst. The NASDAQ index plunged from its height of 5,000 level (reached in first quarter of 2000) to below 2,000 points within a year. Events that took place subsequently, though each deserves an Act of its own, happened too quickly that a montage in bullet points might be best employed in laying them out:
1. The trouble at Enron that brought itself to bankrupcy (filed for Chapter 11 in July 2001) and also led to the collapse of its external auditors, Arthur Anderson;
2. Conflict-of-interest scandals within the investment banks and stock-broking houses. Among which are those involving Henry Blodget, an Wall Street analyst who was recommending Hi-tech stocks to clients while privately rubbishing the same stocks, and Frank Quattrone, an investment banker who was allegedly allocating IPO stocks to his clients or prospective clients as favours in exchange for business engagements.
3. The September 11 Attack that depressed the stock markets further and ensured a prolong U.S. recession that began in March 2001, as later confirmed by the National Bureau of Economic Research.
4. The full weight of the events above trigger further corporate collapse and, along with the downfalls, more corporate scandals. The more prominant ones are:
Global Crossing Ltd (filed for Chapter 11 in January 2002);
Worldcom (filed for Chapter 11 in July 2002);
Tyco International (recorded US$9 billion losses in Fiscal Year 2002).
5. The Outbreak of SARS epidemic in November 2002 further depressed economic activity in Asia.
The confluence of events in Act 3 led to a notion that the global financial markets were collapsing and world economy is slipping into a severe recession. Additionally, manufactured goods coming out of China at ever decreasing prices was driving home the point that had there not been any intervention, not only was the world entering a recession, it would be coupled with deflation. It was further argued that deflation, once fully entrench, is even more difficult to get out of using monetary policy.
To slay the beast with dual heads (recession and deflation), US Federal Reserve promptly slashed interest rate at historical pace and kept real interest rate at near zero level for a long period of time. The rate was cut from 6.5% at end of 2000 to 2% by the end of 2001. By July 2003, it was already at (then) historical low of 1%. It was kept at that level for close to one year before the rate was slowly brought up from middle of 2004 to above 2% in beginning of 2005.
Reflecting on historical inflation data of the 3 years between 2002 and 2004 collected monthly, US inflation has fluctuated between 1.07% and 3.73%. Over the same period, Fed Fund Rate was managed within 1.0% and 1.75%. i.e. real interest rate during the 3 years was mostly in the negative region.
Not missing out the opportunities to push for his political agenda and win votes, President Bush launched two major tax-cut packages in 2001 and 2003.
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