Is panic a necessary component of a financial crisis?

Certainly, that's an excellent question. In short, the answer is: Yes, panic is not only a part of financial crises but also their catalyst and amplifier.

Without panic, many financial problems might just be "hard mode," but with panic, they immediately escalate to "hell mode."

You can understand this in the following way:

1. The Essence of Financial Markets is "Confidence"

Imagine a bank. We deposit money into a bank not because we can see our cash piled up in a vault, but because we trust that the bank will be able to give us our money when we want to withdraw it. Banks then lend our deposits to others or invest them. The entire system operates on this "confidence."

Stocks, bonds, funds, and other instruments in financial markets are also based on "confidence" in the future. We believe this company will make money, and this project will succeed.

2. "Spark" vs. "Fire"

A financial problem, such as a large company losing a significant amount of money due to investment failure, or housing prices starting to dip, is like a small "spark." Under normal circumstances, the market can slowly digest this bad news, adjust, and the issue passes.

But panic is like pouring a large can of gasoline onto this "spark."

For example: In a crowded movie theater, a small trash can in the corner starts smoking (this is the "problem").

• Without panic: People see it, someone calmly grabs a fire extinguisher and puts it out, or people evacuate in an orderly fashion, and nothing serious happens.
• With panic: Someone shouts, "Fire! It's going to explode!" Everyone immediately rushes to the exits in a frenzy, pushing and trampling each other. As a result, the exits become blocked, and what was originally a small problem leads to massive casualties.

In this stampede, what truly caused the casualties was not the small flame, but "panic" itself.

A financial crisis is a typical "stampede" incident.

3. How Does Panic Ignite a Crisis?

When panic spreads, several chain reactions occur:

• Bank Run: Depositors hear rumors, fear the bank will collapse, and so everyone rushes to withdraw money at the same time. However, most of the bank's money has been lent out, and the cash on hand is simply not enough. Even healthy banks cannot withstand such a run, and thus they truly collapse. This is the "collapse of confidence."
• Fire Sale: Investors fear that their stocks, bonds, and properties will become worthless, so they start selling frantically, regardless of the cost. You sell, I sell, leading to a cliff-like drop in prices. This decline isn't due to a deterioration in company fundamentals; it's purely due to panic. Everyone is scrambling to escape, and no one cares what things are actually worth.
• Liquidity Freeze: When everyone wants to convert assets into cash, and no one is willing to buy, the market "freezes," meaning there's no liquidity. Companies can't borrow money, banks are afraid to lend to each other, the entire financial system's blood coagulates, and economic activity grinds to a halt.

Conclusion

Thus, you can see:

A financial problem that might initially be localized and controllable can, under the contagion and amplification of panic, quickly evolve into a system-wide, self-fulfilling disaster. People, fearing a crisis will come, take actions that actually cause the crisis to materialize.

Therefore, panic is not only an essential component of financial crises; it is itself the core mechanism by which a crisis escalates from a "problem" to a "disaster." Managing market expectations and rebuilding confidence thus become one of the most crucial tasks for governments and central banks when responding to financial crises.