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Is social media the new stock bubble?

April 6, 2011

Is social media the new bubble? Should the Fed care?
By Oregon Tax News,

As technology expands, companies find themselves with increased market values. The emergence of social media (more than 500 million accounts on Facebook alone), combined with mobile phone use (4.5 billion), is dramatically changing technology. Currently, Facebook is valued at $75 billion, making the social-media giant more valuable than Disney. In addition, John Swartz and Matt Krantz reported in USA Today that Groupon, an online coupon site recently turned down a $6 billion buyout offer from Google, according to published reports.Americans’ fascination with technology is not a new fad. Although Tech and Internet stocks crashed in the dot-com bust of 2000, tech companies are reviving the get-rich-quick feelings toward tech stocks. The expansion of technology today is similar to the late 1990s in Silicon Valley. Netscape Communications’ stock prices rose to $75 a share in its first day of trading in August 1995. Unfortunately, tech and internet stocks crashed. Stockholders faced the fall of the Nasdaq index from more than 5000 in March 2000 to 1100 in late 2000 followed by a terrible recession.

John Swartz and Matt Krantz warned in USA Today that this current tech bubble could end as poorly as the last tech bubble of the 1990s. Today, the social media and mobile-internet technologies are much more popular than most of the dot-com stocks of the 1990s. The euphoria that surrounds today’s technologies is similar to the euphoria surrounding the new technologies of the early 1990s, such as eBay and Yahoo!, could fizzle.

As investors grow confident again, economists wonder whether the Federal Reserve Board will intervene and deflate an asset price bubble before it grows large enough to threaten the financial system and economy once again. Chris Farrell of Bloomburg Businessweek argues that the answer is no. Instead, Farrell believes that the Federal Reserve Board should actively prepare institutions for the fallout of another bursting bubble, rather than attempt to prevent one from happening.

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