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CHAPTER 3
Bubble Land: Practice Runs
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lthough exciting new technologies fueled the dot-com boom, the bubble itself was a standard case of stock market hype and overshoot. But the decade from the late 1980s to the late 1990s also saw three other, much different boomand-bust cycles. There was a big crash in residential mortgages in 1994 and two big trading-based crises—the 1987 stock market crash and the 1998 Long-Term Capital Management crisis, which the Federal Reserve at one point feared might bring down the whole global finance system. All three of those episodes arose from fundamentally new investment technologies, enabled by breakthroughs in desktop computing and by an influx of mathematics PhDs to Wall Street. The new “quants” could carve up and reassemble oldfashioned asset classes so they were custom-fit to investor needs. Large-volume computerized trading could exploit tiny 37
