Best of the Net - 'Black' Monday September 29, 2008

In Wall Street, as elsewhere in 1929, few people wanted a bad depression. In Wall Street, as elsewhere, there is deep faith in the power of incantation. When the market fell, many Wall Street citizens immediately sensed the real danger, which was that income and employment - prosperity in general - would be adversely affected. This had to be prevented. Preventive incantation required that as many important people as possible repeat as firmly as they could that it wouldn't happen. This they did. They explained how the stock market was merely the froth and that the real substance of economic life rested in production, employment and spending, all of which would remain unaffected. No one knew for sure that this was so. As an instrument of economic policy, incantation does not permit of minor doubts or scruples.

- John Kenneth Galbraith from The Great Crash, 1929.

Today has the feel of a very significant day in history. Not because of the Dow being down 777 points. Not because of the bailout bill not going through. But because of the enormous change in sentiment that has accompanied those events.

For years, the average person has been relatively immune to that crisis from afar. There had been the subprime crisis, a housing crisis, an oil crisis, and now a credit crisis. For a large portion of the world population, these issues only affected "other people."

For years, we have been sold the mantra that "the fundamentals of the economy are sound." That there may be a setback, but no recession. Certainly not a depression. Only a lunatic would even mention such a thing. We've been told that numerous solutions would be the eventual cure, yet none has helped one iota.

Today something happened. People realized that this issue is not one that can be resolved simply by the government snapping their fingers. The average person has just seen all of their supposed smartest officials fail on agreeing to a solution. It tells people that there is no short term cure other than time. It tells them these issues were going to slow the economy, that many would lose their jobs. That realization is what caused world markets to crater in unison today. A simple change in sentiment. We've made the progression from denial to migration to panic. How far away will be despair?

Why do we keep making the same mistakes over and over? It's because we are conditioned to do so. All the John Kenneth Galbraiths and Murray Rothbards that experienced and understood the last crisis are gone. In their place are harvard graduates who say their quant model tells them this shouldn't be happening.

Days like today are actually a step forward, rather than a step back. The faster the process of price discovery, the faster our savings can be put to productive use. The more bad businesses that are destroyed, the more good businesses can eventually replace them. This is the natural evolution of markets. It will be painful, but it is necessary. The bubble cannot be inflated any larger than it was.

Todd Harrison had these words on the significance of today's dislocation.

Bennet Sedacca says, "Welcome to Deflation. I'd have to agree.

We'll see what happens tomorrow. But these bouts of major selling don't generally end in one day.