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The Crash of 2002
CNN, July 19, 2002

Ten trading days, 1,360 points off the Dow. Let's start calling the "sell off" what it is. Let's call it a panic. Let's call it a crash. Indeed, after rallying following Sept. 11, the markets topped out in March, and have been careening downward ever since: The Dow is down 25 percent since then; the S&P 500 is down 27 percent, and the Nasdaq is down 32 percent. People worry that, with $7.7 trillion knocked off U.S. market capitalization since March 2000 ($750 billion in the past week alone!), the selling will bleed into the economy, not just snuffing the recovery but sending the country into a deflationary episode like the one Japan labors under. Or like the U.S. strained under in the 1930s. The fear breeds selling, the selling breeds more fear. Some economists have even begun to talk about how the Fed could step in and cut rates to try and stanch the bleeding - while at the same time they worry that for the Fed to do that would only stoke the market's fears.

Remember 1998? This script is starting to look familiar, says James Padinha, economic strategist at Arnhold & S. Bleichroeder. It's starting to feel like 1998, when fears ran high that financial crisis would seize up the economy. "It's just eerie," he said. "We have exactly the same kind of thing going on." In the latter half of 1998 a debt crisis in Russia and hedge funds, which were almost as profoundly overleveraged as they were mispositioned, sparked a global flight to safety in the markets. ...

Unlike 1998, the current crisis is rooted in the United States. It's our stock market bubble that popped. The U.S. was attacked, and our CEOs cooked the books. In 1998 U.S. investors were staring out at the world and wondering where it would end. Now the world's investors are staring at the U.S. and wondering the same thing. Griffin can imagine, he said, a Japanese-style pullback from risk in the U.S., in which investors give up, banks refuse to lend and the economy languishes. He can imagine other countries, accustomed to the United States' role as the world's economic locomotive, not taking up the standard. He can imagine a crisis of capitalism of a 1930's order. Griffin thinks the people talking about deflation are probably wrong, but he doesn't think they're crazy. We can be smug now, and say the 1987 crash, when the Dow dropped 30 percent in two days, was all about the way investors were using portfolio insurance. But at the time it seemed much bigger than that. At the time people were seriously entertaining the idea of a depression. We're not there quite yet, thinks Padinha, but we're on our way. He can see the panic growing, see the 1930s references getting progressively more ink. He can imagine the Fed cutting and people arguing that lower rates won't do a thing. That moment - and who knows how far down from here it is - will be the sign. "Right there is the bottom," he said. "The bottom for the funds rate, the bottom for the market, the bottom for everything."