It’s been 17 months since the stock market nosedived in April 2000. Since that time, many tech companies have gone out of business, hundreds of thousands of people have been laid off, and “old economy” companies have seen their profits disappear.

What caused the collapse? Well, for one thing, the spectacular rise in the markets wasn’t real to begin with; it was a “bubble,” as economists call it. Yet, underneath the hot air, there was a basis to the dot-com and high-tech frenzy.

What kept unprofitable tech companies alive and made them seem like attractive investments was the huge amounts of cash they attracted in venture capital. After the Asian collapse of 1997-98, followed by the Russian economic collapse and the Brazilian crisis, wealthy investors from around the world were looking for a place to put their cash. They yanked their money out of overseas investments and put it into venture capital firms here in the US. Those venture capital firms then poured cash into the dot-coms, hoping for fantastic returns on the “new economy.”

At the same time, the Y2K scare was making the rounds, forcing everyone from local mom-and-pop stores to multinational corporations to national governments into a hardware and software buying frenzy to avoid any potential shut-downs on January 1, 2000. When 1/1/00 came and went without incident, the tech-buying frenzy died.

Then April 2000 arrived and brought bad news: technology companies were reporting low earnings for the first quarter of 2000. At the same time, people who had cashed in their stock options in 1999 had to sell stock to pay their tax bills which were due on April 15th. The markets plummeted. People who had borrowed money on margin to buy stocks were suddenly wiped out. Non-tech companies that had accepted stock from tech companies in payment for services were left with huge holes in their balance sheets.

In addition, a large number of companies had been reporting net gains in 1998 and 1999 that had nothing to do with their operating profits. Instead, those companies had operated at a loss, but made up the difference by investing some of their income in buying and selling high-flying tech stocks. When the NASDAQ collapsed, those companies were suddenly exposed as money-losers and their own stock prices dove.

The loss to tech companies has been incalculable. Most of these companies were financing mergers, acquisitions, and even basic operating expenses with stock instead of cash. Not any more. The 100 biggest tech companies in Northern California, for example, have lost an estimated $2 trillion in market capitalization. In the past eight months, tech companies have laid off about 358,000 people nationwide. The unemployment rate in San Francisco has doubled; in Santa Clara County it has more than tripled.

Yet the market is still overvalued. A recent article in the Wall Street Journal exposed the now-common practice of manipulating price/earnings ratios. The P/E ratio is used by most investors to determine whether a stock is overpriced or a good value. The P/E ratio is calculated by comparing the company’s stock price (P) to its net earnings per share (E). The net earnings per share is figured by taking the company’s income minus its expenses and dividing that amount by the number of shares of stock outstanding (held by all the shareholders in the world).

The historical average P/E for the S&P 500 is about 15/1; in theory, any stock that has a P/E lower than that is usually considered a value. There are some exceptions: if the company has some legal tie-ups, owns large amounts of worthless assets, or has other problems that may drive it into bankruptcy, a low P/E is a sign of trouble. This is why investors often rely on Wall Street analysts for “tips” on good stocks; these people are supposed to carefully look at a company’s balance sheet, its legal situation, and its history, and determine if a company’s low P/E is an indicator of value. But most Wall Street analysts are careful not to antagonize the companies they watch, lest they be cut off from the information they need.

In addition, there’s a whole media circus built around the financial markets. To them, the P/E ratio of each company–and, by extension, the average P/E of the S&P 500–is one of the benchmark numbers that every investor must know in order to make the decision to buy or sell. The P/E is viewed as unassailable, untouchable, unquestionable. It is never dissected, and it is always reported as the gospel truth.

But it’s unreliable. The very basis of the P/E ratio–net earnings–is now a meaningless number. The Securities and Exchange Commission can’t force companies to adhere to GAAP (General Accounting & Auditing Practice) standards. And so companies routinely inflate their net earnings.

According to the Wall Street Journal, the problem began in late 1998, when two companies, Yahoo and our very own Amazon.com, began excluding certain regular expenses from their net earnings calculations. This made their losses seem a lot smaller than they really were. Other dot-coms followed suit. Soon other tech companies were doing the same and, before long, “old economy” companies had also joined the bandwagon. Many companies have even made their net losses magically disappear and net gains appear in their place. As the Wall Street Journal commented: “Sometimes the results are nothing short of surreal.”

Naturally, this manipulation of P/E ratios is suckering lots of investors into buying stocks because they think they’re getting a good value. In fact, they’re not. Analysts currently say the P/E ratio of the S&P 500 is 22/1. In reality, the P/E ratio is about 36/1–more than double its historical average–so the market is still vastly overvalued.

There’s a lot of hype and price inflation on the NYSE and the NASDAQ. The bubble has deflated a little, but it’s still very much there.