Tech Bubble Talk Boils Over

The debate over whether the tech sector is entering another bubble, in which madness reigns and prices are detached from reality, is reaching a fever pitch as we move into 2007.

The Wall Street Journal recently took up the debate, offering a point/counterpoint discussion with two prominent venture capitalists on whether the new surge in Internet startups, commonly called Web 2.0, means that the sector has again slipped the leash of sanity and is reveling in the same kinds of excesses that it swore off only a few years ago.

That same discussion has been brewing among pundits and bloggers for months. A Technorati search on the phrases "Web 2.0" and "bubble" yields 11,000 results. The same search on Google's main engine brings up 1.8 million pages.

For a couple of years, I have been monitoring signs of a new bubble. Sure enough, evidence is suggesting that a new bubble, while clearly not yet a reality, is increasingly possible.

One of the misconceptions about financial bubbles is that they only happen once in a generation. According to a report from the International Monetary Fund, U.S. stocks fell 26.8% between 1875 and 1877, following a rally of 50.5% in the previous two years. That rally had been driven by speculation in new railroads, an industry that has recently been compared in both its growth and impact to the Internet sector.