On days like today, it’s tempting to use terms like “bloodbath” and “catastrophe,” and all those muscular-sounding adjectives that headline writers use to really pump up the hype, and plenty of media outlets were doing just that. Others were trumpeting the fact that this was the biggest-ever drop on the Dow and other indexes — but of course, that only applies if you’re looking at the number of points that they fell. If you look at it in terms of the market’s percentage decline, then it was definitely a bad day, but a long way from the worst ever. In 1987, the Dow fell by more than 23 per cent, while yesterday it fell by less than 7 per cent.
As a friend pointed out, the drop today — which came after a proposed Wall Street bailout package failed to make it through Congress — was also roughly equivalent to the amount the Dow climbed two weeks ago, when the $700-billion bailout was first announced. A number of people noted that the drop today obliterated all the gains of the last eight years, but of course that measures from close to the peak of the dot-com bubble. If you start measuring from the bottom of that precipice (which came in 2002) the market is still up by almost 3,000 points or about 40 per cent.
I’m not trying to play Pollyanna here. The financial meltdown that the U.S. has seen over just the past couple of weeks is unprecedented, and in many ways it makes previous government-led bailouts such as the Long-term Capital Management crisis in 1998 (which was also caused by overly optimistic risk-assessment models coupled with rampant greed) look like a kid’s birthday party by comparison (Mike Masnick at Techdirt has a great all-around background post). We are going to be seeing the unwinding of those bloody entrails for some time, and it’s not going to be pretty. But pouring gasoline on the fire of panic isn’t really helping.