Behind the 800-point drop in the Dow...

Sure, it's easy to refer to Wall Street investors as drama queens (i.e., 800-point drops in the Dow before rebounding to finish with 'only' a 370-point decline), but the rout in the financial market is happening so fast that no one's interested in waiting to see whether or not this bailout plan will even work. From a story in the International Herald Tribune:

We woke up Monday morning, all of us, hoping for the best but bracing for the worst. The U.S. government's $700 billion bailout package had been passed into law, which offered hope of a respite from this unrelenting crisis — or at least a chance to catch our breath.

We all needed a break. But we didn't get one. Instead, we got yet another horrible weekend. In Europe, the credit contagion raged like a wildfire. The Dutch government seized Fortis, the Belgian-Dutch bank. The German government bailed out a huge lender, Hypo Real Estate. European governments raced to follow Ireland's lead and guarantee all bank deposits, fearing that if they didn't, depositors would move their money to "safer" countries with guarantees. The euro and the British pound sank against the dollar...

But the situation on Monday was far worse in the credit markets — as has consistently been the case during the crisis. "There is no liquidity anywhere," one hedge fund manager told me. "No lending available. No interbank lending available. The fixed-income market is completely shut down. There is no activity going on anywhere." (He asked me not to use his name because he didn't want to spook his investors.)

The Federal Reserve announced yet another enormous injection of liquidity into the system Monday morning, saying it would make as much as $900 billion available. "What the Fed said was that it wasn't just opening the window," said Daniel Alpert, managing partner at Westwood Capital. "It is taking out the window sill and chipping out the bricks around it."

The Fed's move was barely noticed. Now there's talk of another intervention by the Federal Reserve to help thaw the frozen credit markets by buying up short-term commercial debt...

"What I am worried about with all these bailouts," said the great Wall Street historian Ron Chernow, "is whether they are going to eventually tax the resources of the federal government. The numbers are already getting very, very large. What is especially scary and unsettling is that even actions of this magnitude have not seemed to restore confidence. Each time, you thought that would be the one to stop the contagion. It hasn't happened."

This panic is taking place in such a compressed time frame that it is just astonishing. Chernow pointed out that while the stock market crash of 1929 took place over three brutal trading days in October 1929, it took nearly three years to reach bottom. By then, stocks had lost a shocking 89 percent of their value.

This crisis, by contrast, seems to be moving at hyper-speed — one day it is Lehman Brothers, the next AIG, the day after that Washington Mutual. This crisis doesn't wear you down over time. It hits you over the head with a two-by-four. On a daily basis...

Sad to say, the crisis does not appear to be winding down. One reason the market acted so skittishly Monday is that it simply can't wait six weeks or so before the government is ready to start buying the first $250 billion worth of toxic securities from troubled firms. In normal times, this would seem blazingly fast. In these compressed times, it seems terribly slow. The markets want to know — right now — whether the bailout plan will work...

A third problem, though, is that confidence keeps eroding. The latest wrinkle is that many hedge fund investors, fearing big losses, no longer have confidence in their hedge fund managers. Thus, hedge fund managers are preparing for huge withdrawals at the end of the year, and so they are selling billions of dollars worth of stock preparing to pay redemptions. That is one reason the stock market is under pressure...

Twelve years ago, Alan Greenspan invented the term "irrational exuberance." That era seems tame compared to this one. What is going on in the markets is anything but exuberant — at this point, though, it is undeniably irrational.