Today was not the end of the financial carnage in equity markets. While 24/7 news cycles, collars and index options have all increased volatility, what we are dealing with now is simple panic. Asian Markets Plunge After Huge Wall Street Losses [International Herald Tribune]. In the 19th century, economic recessions were called “panics” because they usually led to GDP deflation, bank runs and currency inflation (a flight to safety, i.e., gold).
Crop failures, drops in cotton prices, reckless railroad speculation and sudden plunges in the stock market all came together at various times to send the growing American economy into chaos. The effects were often brutal, with millions of Americans losing jobs, farmers being forced off their land and railroads, banks and other businesses going under for good.
And they happened with frequent cyclicality, 1819, 1837, 1957, 1873, 1893. But the last major event to be called a “panic” was the Panic of 1907. The New Deal’s regulations and Federal Reserve system, coupled with the end of the gold standard, were supposed to end all of that.
Well in my view the past 10 days demonstrate that despite our technological and financial advances, the 21st century looks a lot like the 1800s. Even if the deflationary consequences — except in housing, of course — have not hit like they did 150 years ago, we are dealing with the same sort of psychological panic from which modern capitalism was supposed to be immune. It obviously ain’t.