In the United States between roughly 1995 and 2000, a speculative mania for internet stocks drove the technology-heavy Nasdaq Composite index to a peak of 5,048.62 on 10 March 2000, after which it collapsed, falling about 78 percent to a low near 1,114 by October 2002 and erasing on the order of 5 trillion dollars in market value. The dot-com bubble is the defining financial mania of the internet age: a frenzy in which companies with no profits, and often no plausible path to them, were valued at billions on the strength of a story about the future.
The mania ran on a new and corrosive idea about value. As a genuinely transformative technology arrived, investors and entrepreneurs persuaded themselves that the old measures — revenue, earnings, the price-to-earnings ratio — no longer applied to internet companies, and that growth in users, page views, and “eyeballs” was the metric that mattered. A start-up’s strategy became “get big fast”: raise enormous sums, spend them at a furious “burn rate” on marketing and expansion to capture a market, and trust that profits would somehow follow scale. By the peak, the great majority of newly public technology companies were losing money, yet were valued as if dominance were already theirs.
The plumbing of the boom was the initial public offering. Underwriters and a credulous market rewarded internet start-ups with spectacular first-day stock “pops,” so that founders, venture capitalists, and early employees grew rich the moment a company went public, regardless of whether it ever earned a cent. That rewarded raising and spending money over making it, and it pulled ordinary investors — newly armed with online brokerage accounts and a financial media that treated tech founders as visionaries — into buying at any price, certain a greater fool stood behind them.
The break came in the spring of 2000. The Federal Reserve had been raising interest rates, making the cheap capital that fed the burn rates costlier, and a market that had run on belief began to question it. The Nasdaq peaked on 10 March, slid, and then plunged through April; over the following two years the unprofitable companies ran out of money and failed in waves — Pets.com, Webvan, eToys, Boo.com, and hundreds more. The technology was real and would remake the world, and a handful of survivors, Amazon and eBay among them, justified the early faith. The prices, for almost everyone else, did not.
In the United States between roughly 2000 and 2006, the price of the typical American house nearly doubled, propelled by an almost universal conviction — held by borrowers, lenders, rating agencies, regulators, and the largest banks on Wall Street — that house prices could not fall nationwide. That conviction collapsed in 2007–2008. The S&P/Case-Shiller national home price index, which peaked in the first quarter of 2006 at about 198, fell to roughly 114 by early 2012, a decline of more than 40 percent from peak to trough, and the financial machinery built on the assumption of ever-rising prices failed catastrophically.
The delusion was not chiefly about flowers or tulips but about correlation. Lenders extended mortgages to borrowers who could not plausibly repay them — the subprime loans that grew from about 5 percent of originations in the mid-1990s to roughly 20 percent, around $600 billion, by 2006 — because the loans were not meant to be repaid so much as refinanced or sold. Wall Street pooled those mortgages into securities and sliced them into tranches, and the rating agencies blessed the senior pieces as nearly riskless on the statistical premise that home prices in different regions would not all fall at once. They did all fall at once.
When prices turned in 2006 and defaults rose, the chain ran in reverse. In 2007 two Bear Stearns hedge funds invested in mortgage securities imploded; through 2008 the losses spread until the investment bank Lehman Brothers filed for bankruptcy on 15 September 2008, the largest such filing in US history, and the global financial system seized. US household net worth fell by an estimated $13 trillion; foreclosure filings surpassed 3 million in 2008 alone; and the recession cost roughly 9 million jobs. The episode proved a mania need not be confined to amateurs: the most sophisticated institutions in the world, armed with risk models and credit ratings, talked themselves into the same single error — that the thing going up would keep going up — and built a global edifice of leverage on top of it.
In late January 2021, shares of GameStop — a struggling American video-game retailer that began the month near $17 — spiked to an intraday high of $483 on 28 January before collapsing by roughly ninety percent within weeks. The surge was organized largely on the Reddit forum r/wallstreetbets, where retail traders had spotted that hedge funds had sold short more shares than the company even had freely trading, and set out to force those bets into ruinous reverse. For a few days the plan worked spectacularly; then the price came down almost as fast as it had gone up.
The episode was two things at once, and the confusion between them is the heart of the case. It was a genuine short squeeze with real market mechanics: with short interest reported at roughly 140 percent of the public float, every dollar the price rose forced bearish funds to buy shares to limit their losses, which pushed the price higher still. Melvin Capital, one of the largest shorts, lost so heavily that it took a $2.75 billion cash infusion — $2 billion from Citadel and $750 million from Point72 — on 25 January, and shut down entirely the following year. But the squeeze was also a social-media euphoria in which a far larger crowd, drawn by viral posts, defiance of Wall Street, and the dream of life-changing gains, bought a near-worthless business at a price no fundamental analysis could justify.
The two stories had different endings. The squeeze itself was a finite, mechanical event: once the trapped shorts had mostly covered, the engine that drove the rocket was spent. The euphoria lasted longer and cost more, because the people who arrived late — many buying on 27 and 28 January at prices above $300 — were not squeezing anyone. They were the greater fools of a classic bubble, holding an asset whose price depended entirely on the next buyer paying more. When the brokerage Robinhood and others abruptly restricted buying on 28 January, the inflow stalled, and the price fell from $483 toward $40 over the following weeks.
The aftermath reshaped both regulation and folklore. A congressional hearing in February 2021 put a Reddit trader, a Citadel founder, and Robinhood’s chief executive at the same virtual table. An SEC staff report that October concluded, contentiously, that sustained positive sentiment rather than the buying-to-cover of trapped shorts kept the price elevated for weeks — a finding that, if correct, makes the later phase less a squeeze than a self-reinforcing crowd. Either way, GameStop became the founding myth of the “meme stock,” a template for collective speculation that has recurred since.