The Moment

Historians trying to decide when the Panic of 2008 began may look to the morning of Oct. 6, when the U.S. government's vaunted $700 billion rescue plan barely slowed the market meltdown. The usually ebullient CNBC host Jim Cramer went on Today and implored, "Whatever money you need for the next five years, please take it out of the market right now." Retirees were frantic. Even Fed Chairman Ben Bernanke, his face a rictus of worry, said the economy probably won't improve until next year. Stocks veered wildly.

Financial panics--short-term, acute market upheavals that often coincide with long-term recessions--were common as the U.S. economy developed. There was the Panic of 1857 (prompted by railroad-bond defaults), the Panic of 1873 (sparked by a stock crash in Vienna) and the Panic of 1907, which started when shaky New York City banks quit lending. We learned a lot from those scares--the U.S. Federal Reserve was created in the wake of the 1907 Panic--and some believed we were too smart to panic again.

But fear is a persistent emotion, one embedded by evolution in our lizard brains. That's why there's no precise economic definition of a market panic; it's more a psychological than a fiscal phenomenon, simultaneously anticipatory (you think something terrible will happen) and retrospective (you think you have waited too long to avert disaster). Swimmers being dragged to sea in a rip current often try to swim directly to shore--against the current--and end up exhausting themselves. Panic can kill.

Years ago, the Princeton psychologist Hadley Cantril posited that social panics occur when large groups can't discern reliable sources of advice from unreliable ones. The jumbled frenzy of 24/7 information access may be making our current panic worse. It's tempting to check your investments every few minutes. But having more information, in this case, isn't necessarily better. Panic attacks end when you take a deep breath, and a step back.