Out of Control Policy Blog

Sock Puppet Wants a Bailout

An amusing video on Reason.tv l imagines the Pets.com sock puppet going before Congress to request a bailout. Pets.com, you might recall, was among the many Web-based commerce companies to go under during the dot-com bust of 2000-2001.

The video is a humorous reminder of what was then a significant sector-specific meltdown. The telecom and IT sector began taking a beating in 1999, resulting in lost jobs, lost portfolios, bankruptcies and consolidations. Most recall the era for its demise of a large number of Web start-ups, often launched without realistic business plans and purely on and arrogant faith the "Internet model" was different. Rampant investment led to overevaluation of most companies and their assets (where there were assets), and ultimately the market corrected itself.

But a number of established companies took hits as well. Lucent Technologies, the one-time manufacturing arm of AT&T, shrunk to about one-third its size and ended up merging with France's Alcatel. Lucent's Canadian rival, Nortel, experienced a more dramatic fall-off in business. Wireless titan Motorola laid off thousands. The stock prices of Microsoft, Hewlett-Packard and Cisco Systems, heavy-hitters all, saw sharp declines. Spending at the major service providers ground to a halt–broadband construction along with it.

What's notable that these companies, and this was just seven years ago, never thought of going to the government for a bailout. They could have legitimately used all the arguments the some banks and car companies industries are making now, starting with the catch-all of "we're-too-big-to-fail." They could also have played the "national security" card (WorldCom's IP backbone carried the bulk of U.S. Internet traffic at the time) or waxed eloquent about the millions of jobs that depend on their health (ask me and my fellow trade magazine editors who were "downsized" in this era). More telling is that rather than believe they had a shot a taxpayer pocketbooks, some of these executives instead committed fraud, lying about their financial performance. What a difference a decade makes! Somewhere disgraced WorldCom chairman Bernie Ebbers is kicking himself.

More to the point, after the dot-com shake-out, the telecom and Internet industry went on to thrive. On the 1998 Fortune 500 list, there were 39 companies with significant stake in IT, telecom and Internet accounting for $611 billion in revenues. On the 2008 list, there were 48, accounting for $1.18 trillion in revenues. The industry did not collapse or evaporate. The market just absorbed the financial adjustment that a recession represents, and the lessons associated with it. Among the lessons learned was that there was little difference between the Web and brick-and-mortar when it came to developing business plans. The greater skepticism among investors has led to stronger businesses since. And while there were a large number of dot-com failures at the time, entrepreneurs who understood how the Web could meet genuine consumer needs were rewarded. Netflix, Overstock.com and Ain't-it-Cool-News were just three dot-coms launched during or just before the dot-com bust and became enormous successes.

There's no denying recessions and market slowdowns hit people hard. But they should not be feared, nor should the government be taking extraordinary efforts to avoid what is, in the general scheme of things, a vital and necessary element in the business cycle. Recessions cannot be legislated away or countered by the sheer force of billions of dollars in "stimuli." They must run their natural course, which can be quite fast in today's business climate. It happened in high-tech and the industry (which seems to be one of the few skirting the current economic climate) and the country is better for it.


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