In Silicon Valley, it's beginning to feel like déjà vu all over again. Much as in the early-to-mid-90s, a euphoria is surrounding new consumer technologies. Then, it was early Internet software, such as Netscape, and such dot-com darlings as eBay (EBAY) and Yahoo! (YHOO). Now the excitement involves mobile devices such as Apple's iPhone and iPad and social network services such as Facebook.
Tech valuations are once again soaring: Apple (AAPL) recently became the second most valuable company in the world, behind ExxonMobil (XOM), with a market cap of $305 billion. Even more striking is the $50 billion valuation that private investors have placed on Facebook. Groupon, a cyber-coupon company, turned down a $6 billion takeover offer from Google (GOOG) last month, and it's now considering an IPO that could reach $15 billion. "We may be on the cusp of another technology-driven boom," says Erik Brynjolfsson, director of the MIT Center for Digital Business.
Or another tech bubble. The last one ended badly—for stockholders, when the tech-heavy Nasdaq index fell from more than 5000 in March 2000 to 1100 in late 2002, and for everyone else in the recession that followed. Now, as investors grow giddy again, odds are the Federal Reserve Board will confront far sooner than expected one of the most difficult and divisive issues in central banking: Should it attempt to deflate an asset price bubble before it grows large enough to threaten the financial system and economy when it pops?
The answer, in a nutshell, is no. But that isn't the same as saying the Fed should do nothing. Quite the contrary. Much as it's hard to watch a slow-motion traffic accident play out—especially if you're still stumbling away from another totaled vehicle, as we are with the housing crash—it's far better for the Fed actively to prepare institutions for the fallout of another bursting bubble than to try to head one off with its limited array of blunt instruments. The call to action is targeted, but bold, regulatory initiative.
Of course, speculating about a bubble is, well, highly speculative at a time when inflation is dormant and the unemployment rate is 9.4 percent. Nevertheless, the parallels between now and the mid-'90s are striking. For instance, the milestone marking the dawn of the Internet era was the August 1995 initial public offering of Netscape at $28 a share, closing at $58. It captured consumer imagination and woke companies up to the Web's commercial possibilities. The dot.com boom began, with entrepreneurs from Silicon Valley to Route 128 forming startups at an astonishing pace. Established companies raced to invest in e-commerce, construct their own websites, and overhaul their organization to take advantage of the Internet. Think Amazon.com (AMZN), Google, and Monster.com as well as Cisco Systems (CSCO), Microsoft (MSFT), and Intel (INTC).
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