The definitions of terms in financial markets are evolving, to say the least.
The difference between a panic and a crash in the financial markets is an interesting study, and not particularly well defined. Here is our most recent effort.
As a rule of thumb, a correction is a decline in prices of less than 20 per cent. After the declines exceed 20 per cent for at least a two weekly prints on the charts we seem to be in the realm of the panic or a crash.
A panic might best be defined as a sharp decline in prices over a short period of time, usually less than a year, as assumptions and valuations are cast in doubt and corrected, often severly. A panic comes and goes, distorting perhaps the progress of the markets, adding certain safeguards to the regulatory process, but having otherwise relatively small lasting effects to the national economy.
A crash is a watershed event, generational in its scope, always accompanied by an economic slump of greater than a year, often called a depression rather than a recession. Its effects are measured in years. It is a furnace in which the national character is tested and tempered, hammered into something different from what had gone before.
From The Great Crash of 1929 by John Kenneth Galbraith:
"A common feature of all these earlier troubles [panics such as 1907 and 1914] was that having happened they were over. The worst was reasonably recognizable as such.If the Great Depression had never happened, would the Great Crash of 1929 be remembered as vividly as "the great crash" or as a panic such of that of 1907 and 1987? (Give 1987 a little more historic distance, and it will be just a blip in the generational memory, if it is not one already).
The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning.
Nothing could have been more ingeniously designed to maximize the suffering, and also to insure that as few as possible escaped the common misfortune. The fortunate speculator who had funds to answer the first margin call presently got another and equally urgent one, and if he met that there would still be another. In the end all the money he had was extracted from him and lost.
The man with the smart money, who was safely out of the market when the first crash came, naturally went back in to pick up bargains. (Not only were a recorded 12,894,650 shares sold on 24 October; precisely the same number were bought.) The bargains then suffered a ruinous fall.
Even the man who waited out all of October and all of November, who saw the volume of trading return to normal and saw Wall Street become as placid as a produce market, and who then bought common stocks would see their value drop to a third or a fourth of the purchase price in the next twenty-four months.
The Coolidge bull market was a remarkable phenomenon. The ruthlessness of its liquidation was, in its own way, equally remarkable."
The economic progressive believe that the Great Depression was a policy error by the new Central Bank, and are quite confident that it can never happen again, as we are now smarter and better. With the ascendancy of pure fiat currency and sophisticated financial engineering, are all Crashes extinct, merely the dinosaurs of an age of monetary barbarism?
Are financial markets now a science, freed of the emotions and bondage of human nature? Are we now Icarus, released from the bonds of the earth? There are those who believe that this is the case, and their wills and knowledge are being tested as we speak, if only the public can be kept malleable and docile and deluded enough to allow them time and latitude to work their financial alchemy. What if the Fed makes a different sort of policy error this time? Oops?
"There is no worse mistake in public leadership than to hold out false hopes soon to be swept away. The British people can face peril or misfortune with fortitude and buoyancy, but they bitterly resent being deceived or finding that those responsible for their affairs are themselves dwelling in a fool's paradise." Winston Churchill
Plus ça change, plus c'est la même chose
