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The Soaring Nineties

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The 1990s began with the stock market edging to new highs. The Dow Jones Industrial Average, having made its first close above 2,800 on January 2, 1990, broke through the 2,900 level on June 1 and settled at 2,999.75 on two consecutive days in July. On August 2, Saddam Hussein’s Iraq invaded Kuwait. Higher oil prices and the prospect of a wider war pulled the market downward. The Dow retreated to 2,365.10 on October 11.

Fears of how bad the war might be faded once U.S. and coalition forces were in action. The Dow surged 114 points on January 17, 1991, as Desert Storm air strikes began, and it continued rising after coalition ground forces liberated Kuwait in late February. The index finally closed above 3,000 on April 17, 1991.

The U.S. economy had been slowing even before the Iraqi tanks first rolled, and public discontent with the economy stayed high long after the war was over. Finance was one area where job insecurity was particularly high. Journalism was another, a fact that likely contributed to the relentlessly dreary press coverage of the evident recession.

“It’s the economy, stupid” became a catch-phrase of the 1992 presidential campaign of Democratic contender Bill Clinton. Independent candidate H. Ross Perot chimed in with warnings about the federal deficit. The Republican incumbent, George H. W. Bush, insisted the economy was on the mend, but met much skepticism. On November 3, Clinton won the three-way race with 43 percent of the vote.

The recession, in fact, was over. In late December, the National Bureau of Economic Research, official arbiter of recessions, dated it as having lasted from July 1990 to March 1991. The market, for its part, gained moderately in 1992, the Dow moving from 3,172.41 on January 2 to 3,301.11 on December 31. The S&P 500 closed 1992 at 435.71, having crossed the 400 line just over a year earlier. The Nasdaq Composite made its first push above 600 early in 1992 and closed the year at 676.95.

Clinton to Gingrich

Clinton had promised he would “focus like a laser beam on the economy.” That wasn’t easy to do, as controversies arose over gays in the military and Nannygate (the failure of prospective attorneys general to pay Social Security taxes for their servants). As Clinton turned to the economy, his success in getting his economic proposals passed was mixed, even with Democrats in the majority in both houses of Congress. A stimulus package and wide-ranging energy tax both went by the wayside in legislative maneuvering.

Having decided that the budget deficit made his promised middle-class tax cut infeasible, Clinton pushed for tax hikes that, among other things, created new brackets of 36 percent and 39.6 percent on individual income taxes. The tax bill was passed by Congress in early August 1993 with the votes of most Democrats and no Republicans.

The North American Free Trade Agreement passed Congress in November, backed by Clinton but garnering more Republican votes than Democratic ones. The legislative agenda soon turned to health care, as First Lady Hillary Clinton unveiled a plan to restructure the sector. It would get bipartisan opposition and never come to a vote.

The economy was growing, hitting the 4 percent mark in 1994 for the first time since 1988. But public dissatisfaction with the Clinton administration was on the rise, over matters ranging from the botched health-care proposal to the increased tax burden to allegations of scandal going by names such as Whitewater and Troopergate. The Dow oscillated around 3,800, while the president’s approval rating sank into the low 40s.

Democrats lost both houses in the 1994 electoral spanking, and soon House Speaker Newt Gingrich bestrode the Capitol like a Colossus. Republicans got various items of their Contract with America enacted, such as child tax credits and tort reform. But the Republican Revolution, as it was called, would start fizzling by the end of 1995, when a budget clash with Clinton resulted in an unpopular shutdown of parts of the government.

Equity prices, having treaded water in 1994, began an ascent that would reach unprecedented heights in subsequent years. Both political parties would seek some credit for this before too long. Democrats would note the huge gains in share prices that occurred in the Clinton era, and Republicans would point out that the early Clinton years had seen only modest rises, with the real gains starting after the 1994 election.

It may well be that divided government, combining a free-market Congress with a deficit-cutting administration, helped improve the investment climate. If so, both parties could be right in claiming a part in the stock gains of the 1990s. But a great deal of that boom was manufactured in Silicon Valley, and other places far from Washington. Technology drove the market and the economy to places few expected they could go.

Tech Gets Central

Netscape, developer of the first graphical browser for the World Wide Web, went public on August 9, 1995. The IPO, originally planned for $14, was changed to $28 shortly before opening, and the stock soared to $75 on the first day of trading. The Web, invented as a way for scientists to swap data, now clearly had vast commercial potential.

New companies were springing up to do business on the Web. A onetime financial analyst named Jeff Bezos set up an online bookstore, which, after the false start of the cadaver-like name Cadabra, he named Amazon. A site holding the online equivalent of a yard sale evolved into eBay. Two Stanford grad students started Jerry’s Guide to the World Wide Web, soon renamed Yahoo!, complete with exclamation point.

Established companies in the “brick and mortar” world, worried about falling behind the times, were soon setting up their own Web sites. Internet commerce in the U.S. grew from some $45 million in 1995 to $601 million in 1996, and tens of millions of people beat the crowds in the latter year by doing their holiday shopping via computer.

Enthusiasm for technology helped push share prices higher. The Dow, passing the 4,000 line in early 1995, was above 5,000 by year-end. In October 1996, the index bypassed the 6,000 mark, before ending the year at 6,448.27. The Nasdaq Composite, bristling with tech companies, pushed higher than 1,000 for the first time on October 17, 1995. It moved above 1,300 on December 3, 1996, though slipping modestly days later after Fed Chairman Alan Greenspan worried publicly about “irrational exuberance.”

The economy, having grown by 2.5 percent and 3.7 percent in 1995 and 1996 respectively, was kicking into a higher gear. It would expand at more than 4 percent annually through the rest of the 1990s. Inflation, having blipped to 6 percent at decade’s start, was in low single digits and showed no sign of a revival. Broad contentment about the economy helped hand Clinton a 1996 reelection victory over Senate Majority Leader Bob Dole, while Republican majorities were little changed in the Senate and House.

Turbulent Prosperity

Share prices rose fast for much of 1997. The Dow bumped through the 7,000 barrier on February 13, and cleared 8,000 on July 16. The Nasdaq Composite passed 1,500 on July 11. The S&P 500 was still in triple digits but moving up briskly. It breached the 800 level on February 12, and moved past 900 on July 2. Legislation cutting capital gains taxes, passed by Congress and signed by Clinton that summer, helped buoy investor sentiment.

A crisis was gathering in Asia, however. On July 2, Thailand devalued the baht, and soon currencies throughout East Asia were under serious pressure. The Hong Kong stock index dropped more than 10 percent on October 23, sparking a slide in U.S. markets that accelerated on October 27, when the Dow dropped 554 points, then a record. The New York Stock Exchange’s trading curbs kicked in, forcing an early closing.

Before long, though, U.S. stocks were shrugging off the Asian flu. The S&P 500 pushed above 1,000 on February 2, 1998. The Dow crossed the 9,000 line on April 6. The Nasdaq benchmark ascended into the 2,000 range on July 16.

But new crises were on the way. In mid-August, Russia devalued the ruble and defaulted on its debt, sending tremors through markets worldwide. In late September, the New York Fed organized a private-sector bailout of Long Term Capital Management to prevent the hedge fund’s convoluted liabilities from destabilizing the banking system. Once again, American stocks proved resilient. The Dow dipped below 8,000 a few times over several weeks, but rebounded to close the year at 9,181.43.

Investor sentiment also seemed not overly perturbed by the unfolding political crisis of Clinton’s impeachment on perjury and obstruction-of-justice charges stemming from sex scandals. The Dow hovered comfortably above 9,000 in the weeks leading up to the Senate’s February 12, 1999 vote not to remove the president from office.

Dot-Com Mania

The stock boom continued in 1999, with a particular frenzy developing around Internet startups. “Dot-coms” snapped up investment dollars, with little regard to the plausibility of their business plans. Indeed, worrying about a company’s lack of profits — or even revenues — seemed old-fashioned amid the focus on “eyeballs” and “mouse clicks.”

New companies sprang up in every imaginable Internet niche., seller of kitty litter and such, became famous for its sock-puppet mascot. offered free delivery of small goods, like pints of ice cream. Whoopi Goldberg became spokeswoman for, provider of e-currency. Lou Dobbs quit as CNN financial anchor to start celestial Web site (and this writer joined him there on the “launch team”).

The euphoric excesses were symbolized that summer when Stephan Paternot, co-founder of social networking site, was filmed by CNN dancing with his model girlfriend on a table in a Manhattan club, wearing plastic pants. “Got the girl. Got the money. Now I’m ready to live a disgusting, frivolous life,” he said, disgustingly.

But the dot-com boom was not all waste and delusion. From the perspective of almost a decade later, it is clear that companies such as eBay and Google have made lasting contributions, in wealth, jobs and beneficial technologies. As the nineties drew to a close, a mix of genuine innovation and errant overreaching brought stocks to new highs.

The Dow, having broken through 10,000 in March, ended 1999 at 11,497.12, while the S&P 500 closed at 1,469.25. The skyrocketing Nasdaq Composite, having cleared 3,000 on November 3 and 4,000 on December 29, ended the year at 4,069.31.

Roots of a Crisis

Some of the roots of the financial crisis that erupted in 2008 extend back to the prosperous 1990s. During that decade, government stepped up efforts to encourage financial institutions to lend to homebuyers in lower-income and minority areas. This took various forms, including revisions to the Community Reinvestment Act and policy changes at government-sponsored mortgage underwriters Fannie Mae and Freddie Mac.

A New York Times news article from September 30, 1999, headlined “Fannie Mae Eases Credit to Aid Mortgage Lending,” described how Fannie was loosening the standards on loans to low-income borrowers that it would purchase from banks and other lenders, after Clinton administration officials had called for an increase in such lending.

Peter Wallison of the American Enterprise Institute expressed concern. “From the perspective of many people, including me, this is another thrift industry growing up around us,” he said. “If they fail, the government will have to step up and bail them out the way it bailed out the thrift industry.”

There remains a great deal of controversy about how different factors may have contributed to the recent turmoil. Some analysts point blame at the Gramm-Leach-Bliley Act, enacted in 1999, arguing that it increased systemic risk by loosening restrictions on banks getting into securities and insurance.

Bill Clinton, who signed that bill into law, disputed such criticism last September. “I don’t see that signing that bill had anything to do with the current crisis,” the former president said. “Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch by Bank of America, which was much smoother than it would have been if I hadn’t signed that bill.”

Kenneth Silber is a senior editor at Research. His work on science, economics and history has appeared in a variety of publications, including The Wall Street Journal.