Published online by Cambridge University Press: 14 January 2010
“History is continually repudiated.”Glassman and Hassett (1999), The Dow 36,000
Stock market booms and busts command enormous attention, yet there is little consensus about their causes and effects. The soaring market of the 1990s was seen by many, but certainly not all, as the harbinger of a new age of sustained, rapid economic growth. Optimists saw the bull market as driven by fundamentals, although they differed over what these were; while skeptics warned that it was just a bubble, distorting consumption and investment decisions. Regardless of the boom's origin, policymakers feared that a collapse would have real economic consequences and debated how to cope with the market's retreat.
Although the sheer size of the run-up in stock prices in the 1990s has obscured other bull markets in the popular eye, the boom shared many characteristics with previous episodes, notably the 1920s; and the explanations and policy concerns were similar. As in the 1990s, it was widely claimed that a “new economy” had taken root in the United States. Technological and organizational innovations were viewed as raising productivity, increasing firms' earnings and justifying the wave of new issues. In both periods unemployment was low, with stable prices in the 1920s and very low inflation in the 1990s. Participation in the market increased, as investing in the market seemed safer, with reduced macroeconomic risk and the seeming abundance of high-return opportunities.