Soaring Internet stocks 'are good'

WASHINGTON -- Federal Reserve chairman Alan Greenspan says the frenzied rise in Internet stock prices is "good for our system", even though most of the companies are likely to fail.

It is good because it channels capital to promising new enterprises before they make profits, he said in response to questions during a Senate Budget Committee hearing.

The hearing coincided with another blockbuster merger of two five-year-old Internet companies that helped pump up the prices of similar companies.

Yahoo! Inc, a popular Internet search service, announced that it had agreed to buy GeoCities, a money-losing maker of personalised web pages, for US$3.6 billion (S$6.1 billion) in stock.

Mr Greenspan's comments came in response to a question from Senator Ron Wyden, who asked how much of the Internet stock boom "is based on sound fundamentals and how much of it is just hype?"

Mr Greenspan said: "You wouldn't get 'hype' working if there weren't something fundamentally sound under it...Undoubtedly, some of these small companies, whose stock prices are going through the roof, will succeed. And they very well may justify even higher prices. The vast majority are almost sure to fail."

The words were sure to please small investors who have helped drive up the prices of Internet stocks from two- to ten-fold in the past three months.

These investors are wagering that the firms that grow rapidly and grab market share will someday produce profits that justify current sky-high prices.

As a result, the leading companies engaged in commerce over the Internet have stock market values as big or bigger than many of the country's most established and profitable industrial firms.

The market value for the outstanding shares of Yahoo!, for example, equals US$36.3 billion. GeoCities, which lost US$19.8 million on US$18.4 million of revenue last year, was worth US$3.7 billion at Thursday's closing price.

Mr Greenspan would be an unlikely candidate to shrug off the Internet phenomenon. Only a week ago, he said that "the recent performance of the equity markets will have difficulty in being sustained".

On Thursday, however, he took a different tack and rationalised the seemingly irrational. "There is something else going on here though," he said. "It is, for want of a better term, the 'lottery' principle.

"People pay more for a claim on a very big payoff, and that's where the profits from lotteries have always come from." Washington Post

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