We've all been waiting for the bubble to burst. And it may be a blessing in disguise

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The Independent Online

There is a sort of relief that comes when a balloon blown up too far finally pops; a release of all the tension that builds up in the wait for the inevitable bang. Watching the markets, especially those dominated by New Economy shares in internet, computer and telecommunications companies, has been just like that for the past year or so. Now, at last, fear is beating greed.

There is a sort of relief that comes when a balloon blown up too far finally pops; a release of all the tension that builds up in the wait for the inevitable bang. Watching the markets, especially those dominated by New Economy shares in internet, computer and telecommunications companies, has been just like that for the past year or so. Now, at last, fear is beating greed.

The fact that the current share price bubble had been expected to burst for so long marks a big difference between events of the past week or soand previous collapses. The crash of October 1987 had few prophets, whereas April 2000 - if indeed it turns into a fully-fledged crash - will have had many. So far the daily drops in share prices have not been as cataclysmic as those in 1987, when Wall Street fell 20 per cent on "Black Monday". Nor did shares then show any tendency to bounce back after a bad day as bargain hunters piled in to the market.

Still, the Nasdaq index in the US, covering the world's leading New Economy companies, has lost a third of its value in just over a month and 25 per cent in the past week. The judgment of a US court against Microsoft just over a week ago was one trigger. The other was news on Friday of an unexpected rise in US inflation.

These are dramatic falls, demolishing paper fortunes, even though they only reverse the previous two months' gains.

Investors who waited until this year to buy into the dream of the future represented by soaring hi-tech share prices will be the most vulnerable. Not only do they not have all the earlier and substantial gains under their belts, they are also, for the most part, small-time individual investors with much more at stake. In the US many have invested "on margin", or in other words with borrowed money, and will now have to find the cash to cover their losses.

There is no doubt that the financial pain will hit economic growth. To the extent that consumers have been spending because rising share prices made them feel flush, they will cut back now. In America, the stock market had been creating a millionaire roughly every 15 minutes. Even though most had not realised all those gains, the gilded age spending they inspired will come to an end.

In addition, many companies will be forced to reduce their investment spending. Some hi-tech companies will now find it hard to raise funds for investment at all, after the cornucopia of recent months.

Slower growth is exactly what the authorities on both sides of the Atlantic want now. They have been spelling out, in increasingly plain language, the need for a slowdown. In both the US and UK there has been an extraordinary degree of euphoria about the changes taking place in the economy, and the promise held out for future prosperity by new technologies. In both cases, this surging optimism means that demand in the economy has outrun the capacity to meet it, generating huge trade deficits and threatening higher inflation in the future.

Alan Greenspan, the chairman of the Federal Reserve Bank, and Eddie George, his counterpart at the Bank of England, will welcome the setback to share prices as long as it does not pose a threat of wider financial instability.

Mervyn King, a deputy governor of the Bank of England, said as much in a speech on Friday, given as share prices tumbled around him. He said: "If optimism has run ahead of reality, then at some point an awkward downward adjustment to spending must take place." That is as close to straight-talking as you will ever hear from a central banker. But if the reality has been lagging behind, that does not mean the New Economy will prove to have been no more than a dream. While stock market crashes have real economic effects, they do not halt the underlying changes.

So the fact that dot.com shares are nosediving does not mean the internet will not change the way companies do business or the way people work and shop. Nor will it unroll the genetic revolution in pharmaceuticals, a step made possible by computer power. The economic and business landscape will have been transformed in 10 or 20 years. The US is still in the midst of a technology-related surge in productivity, and other countries have all of this to come.

Every time stock markets tumble, sales of John Kenneth Galbraith's classic book, The Great Crash, surge. But there is every reason to believe we are not in for a repeat of 1929. The financial system is more robust, and the policy mistakes made then will not be repeated.

The bigger fear must be the danger of a long period of stagnation, like that suffered by Japan since its bubble economy burst a decade ago.

The problem policy makers now face is how to make the transition from today's roaring boom to a more sustainable pace of expansion without overdoing things. However, with plenty of scope for a slowdown in both the US and UK and plenty of momentum building in the Continental economies, there is a good chance that a shake-out in share prices now will ultimately turn out to be a blessing in disguise.

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