YES, THE INTERNET CRAZE IS LIKE THE DUTCH TULIP MANIA: IT WILL MAKE SOME RICH, MAKE SOME POOR-AND HAVE NO EFFECT ON THE NATIONAL ECONOMY. STILL, THERE’S A BUBBLE LURKING SOMEWHERE – DIM BULBS

The recent explosion in the market capitalization of Internet stocks — to $2.7 trillion, by one estimate — has captivated the attention of the financial press and individual investors alike.

The press, never likely to overlook a cliche, has been full of grim foreboding, and few writers have been able to restrain themselves from making references to the Dutch tulip mania of 1634 to 1637. They’re right, but for the wrong reasons.

The popular memory of the tulip bulb episode is that the Dutch became irrationally caught up in speculation over ever new colors and strains of tulips, and ruined themselves financially by paying huge amounts of money for what were essentially potatoes with attitude. Once everyone woke up, disaster ensued.

The fact is, based on Dutch trade statistics, the tulip bulb mania had virtually no effect on the Dutch economy. (The Netherlands had essentially a trading economy, so trade statistics are the best available measure of the economic impact of the mania.)

Certainly, some people were ruined or at least financially humbled. But others sold in time and reaped vast gains. The internal shift in wealth had no real impact on the overall economy.

The reason is simple. The large Dutch banks and trading concerns were only superficially involved in the speculation.

Most Dutch capital was where it had always been — invested in long-term trading opportunities. Unlike Japan in the 1980s and Southeast Asia in the 1980s and ’90s, the equity of the financial system in the Netherlands was not the primary capital behind the mania, either in creating it (a la Southeast Asia) or in sustaining it (Japan).

Bubble from bubbleheads?

Thus, we have a definition: a bubble is a mania that is bank financed.

By that standard the Internet stocks mania is a non-event.

First, the majority of the stocks are closely held. The entire group could go to zero and 75% of the effect would be felt by probably fewer than 2,000 people.

Second, the remaining equity is extremely widely dispersed among day traders, mutual funds and venture capitalists.

Sure, a few stock-jockey dentists would fall on their swords, but let’s be honest — you’re not going to be contributing to a telethon on their behalf any more than I am.

Manias can happen in societies at any level of economic development, such as the Ponzi schemes that swept places like Romania and Albania in the early post-Communist period. Bubbles, however, require an ethos and myth of triumph.

Many people have forgotten as the Japanese recession plodded along for a decade that the cause of the bubble in Japan was overwhelming economic success. It was Japan’s achievement in building a postwar economic powerhouse, followed by a stunning recovery from the first oil crisis, that led to a belief in ever-greater Japanese economic growth. That belief became entrenched in the West as well as Japan.

Once growth was a given, speculation in land prices followed its own logic, and as prices pyramided, the implacable nature of the belief was self-reinforcing. Companies grew. Land appreciated. Companies owned land. Open the bank spigots. Companies invest the proceeds and grow more. Repeat process…

Sometimes I think there is a human gene that allows mankind to see financial stupidity only after the fact.

Given the amazing success of the U.S. economy over the last seven years or so, it would be incredible if there wasn’t a bubble lurking to some degree amid the victory parades. I believe there is, but how far advanced it is, or how painful its burst is going to be, is hard to decipher at this stage. There are going to be serious losses when the tide goes out, as always. The question is: who loses?

Ted Tyson is chief investment officer of Mastholm Asset Management LLC in Bellevue, Wash. This article was excerpted from the May issue of Mastholm’s “View from the Mast” newsletter.