It all started from the black Monday in 1987, when Dow Jones Industrial Average fell by 23% in one single day. The economic impact has not been contained within the stock market, however, as the black Monday crash was soon followed by a Saving and Loan crisis in the US and a spike of oil price after the beginning of the Gulf War, resulting in an 8 months long recession.

The central bank of the United States, the Federal Reserve, reacted to the recession by slashing the interest rate from almost 10% to 3% during 1989 and 1992, along with other simulative policy in the hope that it will bring the economy back to the long term growth path. It seemed to have worked: US economy has started to recover with the Clinton government returning to budget surplus. The oil price has come down to modest level and the inflation in the US was successfully kept within comfortable levels. The phenomenal growth of Internet technology has hugely increased the productivity across all industries, and sparked the hope of an age of new economy coming.

The good days never last forever. The dot com bubble that burst in 2000 brought the zealous investors back to the reality. To be fair, the FED has already started to notice the heat of the economy before the 2000 peak of Nasdaq and begun to raise the interest rate gradually since the middle of 1999. Such a precautionary measure, however, has not prevented one of the world’s biggest stock market bubbles from bursting, which resulted in the first recession of US economy in the new century. Again the FED reacted by slashing rates aggressively from about 6% to 1.5% in 2 years, and the economy was brought back to the growth path again under this magic. In fact, the 2001 recession after the dot com bubble burst only lasted for 8 months, which is one of the shortest recessions in the history of US. Read the rest of this entry »