Panic

WHY IT HAPPENS AND WHAT WE CAN DO ABOUT IT

Stocks are plunging. Investors can't fulfill their commitments to buy. Borrowers can't pay back loans. We have come to call such conditions in the financial markets "panic."

What it means is "sudden, uncontrollable fear or anxiety," and that fits current conditions. It has come upon us quickly, catching us off-guard. Moreover it seems that events outpace us; no matter what we do, we can't catch up. But if we look more closely at the definition, we see that it is the fear or anxiety that is out of control, not the events themselves. Indeed, we often enjoy the thrill and the challenge of fast-paced, unexpected change: skiing, running rapids, hockey games. What makes the difference with panic is that uncontrollable anxiety destroys the capacity to think. People panic when they lose their minds.

Markets too. In the midst of seemingly chaotic change, the group of people that makes up a market becomes stunned, paralyzed -- or they resort to stereotyped and ritual acts that only make things worse. In short, the group has lost it leadership, the voices of those who provide guidance and direction, the minds those who can still think about appropriate responses.

We see that all too clearly today. Last week's $700 billion bailout did very little to stem the panic. It was cobbled together as if mere action on the part of government itself could restore confidence. The more recent concerted action of European finance ministers and heads of state stands a better chance because, for one thing, it is concerted action. In a globalized economy, one country's actions alone is insufficient -- a lesson one might have thought we might have learned from the Iraq War.

The second thoughtful aspect of their plan is that it addresses directly the problem of assets and liquidity. Rather than simply buying up debt and hoping the market will do the rest, it pumps capital into the market, shoring up the institutions so they can function while at the same time giving government new control over their management. This counters the ideology of the free market, of course, but it addresses the reality of what is happening.

So we are beginning to reclaim our minds. Maybe we can then rebuild our bank accounts. What we don't know we know about panic is how dependent we are on leaders who can think.