A year ago yesterday, the world almost ended. The stock market was in free fall, with the Dow Jones Industrial Average bottoming out at 6547, down from its Oct. 9, 2007 peak of 14164. Financials were in a death spiral and there was even talk of nationalization. Citigroup hit $1.05, GE traded at $7.41 and golden Goldman Sachs was given away at $73.95. A bear market extraordinaire.
Contrast this with 10 years ago today, when the dot-com-laden NASDAQ peaked at 5048. Then we had the opposite mentality—companies like Pets.com were going to fundamentally reshape the economy in the new millennium through a nirvana of spectacular growth and well being. Or something like that. A bull run extraordinaire.
No one would blame you for thinking the market is a textbook delusional-paranoid-schizophrenic, not knowing the difference between the real and unreal. And you'd be right. But you'd miss a valuable lesson. Misallocation of capital is everywhere and anywhere a fallout of bad government policy. The South Sea Company, a government sponsored entity with a monopoly on trade, caused the South Sea Bubble in 1720.
The late '90s Internet love fest was crazy enough, driven by former FCC Chairman Reed Hundt's misguided telecom reform that had the effect of keeping data rates artificially high. This created a gold rush to install fiber and build applications that didn't make economic sense (though electronic commerce, online banking, as well as wireless and broadband deployment would eventually prove productive over the next decade). Bad policy meant capital got overallocated and too quickly, as momentum mutual funds (momos) and day traders furiously drove up stock prices of every company with dot-com in its name for no fundamental reasons. Wall Street trading was broken.