Dow Plunges Again – Panic of 2008?

On Wednesday the Dow Jones average dropped 449 points, a day after the Federal Reserve bailed out AIG. While yesterday the market gained 140 points the net drop for the Dow this week is over 800 points, or over 7 percent.

Honestly, I’m shocked at Wall Street’s behavior today. When the Fed stepped in to save Bear Stearns in March the Dow rallied. When the government took control of Fannie Mae and Freddie Mac, the Dow rallied – at least for a day. I assumed that, with the fear of a disorganized liquidation of AIG off the table, the stock market would rally in relief again.

Instead, investors are wondering “who’s next?” Morgan Stanley, one of the few remaining investment banks took a 24 percent hit today. Goldman Sachs dropped by 19 percent. The financial services industry is in WORSE shape now, even after the AIG bailout, as investors move their money to gold. The price of gold jumped 9 percent as the dollar weakened.

And the one bright spot in the markets – declining oil prices – seems to have reversed course, moving ahead $5 a barrel today.

Taken together, this is the sign of a real Wall Street panic.

Today in my 19th Century U.S. History class I explained to my students why the Panic of 1819 was called a “panic” and not a “depression” or “recession” as later economists would call it. The term “panic” implies lack of knowledge about the future. The Panic of 1819 was the first true economic downswing since the Market Revolution exploded after the War of 1812. Americans had never seen the boom-and-bust cycles that we expect now and so responded in a “panic.” Fortunately for them the panic was short-lived and the economy grew again within a year. The first true “depression” would not hit until 1837.

The conditions of today resemble that panic as investors have no idea how the new global financial system developed over the last 20 years will respond. This is a post-modern bank run, as Paul Krugman puts it. Without marble banking palaces to blame for lost values investors – and by that I mean ordinary people who own 401(k)s and pensions – are worried sick about the stability of the financial system. Who’s to blame? How safe is our money today?

Reassurances from the government seem not to help because nobody really knows the fallout from this crisis. Government negligence is part of the problem so people don’t have much trust in leadership in Washington over this. We could have a soft landing after it’s all said and done with the only damage being the shakeout of the investment banking community. But the effect could be much greater. We just don’t know at this point and that’s not very comforting.