Research Made Possible by Wikipedia

Alright, just to clarify, stock prices do not equal economy. The two are indeed related but I think we all get to wondering about the state of the economy by the falling stock prices. Stocks are basically what someone will pay for a particular piece of a company. In the case of the Dow Jones Industrial Average, it is just that, an average of several companies. The fact that stock prices plummet shows that people are not willing to pay very much for a piece of the economy. This happens when people panic at a piece of news and attempt to sell their stock before the company goes under and they loose everything. At least that's how they see it. Problem is, when this become widespread and everyone panics, no one really wants to buy it and prices drop drastically.

In the 1920's, this caused major problems because people were borrowing money to invest in stocks, hoping to make a return. When they didn't, they couldn't pay back loans, banks didn't get their money, people panicked and ran to the banks to get their money before the bank completely ran out of money, banks fell apart, not having enough money to cover the massive withdrawal, other companies lost money from their banks, there wasn't money in the right places, companies had no business and hence laid off workers and there was an overall mess that led into the great depression. Note that this took years from the Black Tuesday in 1929 to the stock bottoming out in 1932 and many years more to rebuild what had been broken. Also note that while the crash led into the depression, it wasn't the cause. If anything, the depression caused the crash!

Another interesting panic was the one in 1907 where some rich guy thought he could get richer by cornering the market in copper and squeezing money out of investors. Well that didn't work and his bank lost money. People lost confidence in all banks, companies with stocks lost collateral on loans being called in and J.P. Morgan, John Rockefeller and New York's richest guys bailed out the banks to cover the cost of the run on the bank (Andrew Carnegie probably would have helped but he sold his small business to Morgan and retired six years earlier). And by bailed out, I mean it was a loan.

My verdict? Speculation is bad, some kinds worse than others. As is greed and corruption, all the time. And above all take advice from the Hitchhiker's Guide to the Galaxy, DON'T PANIC!!! Just don't do it.