By such winnowing of inefficiencies, productivity is enhanced and standards of livings expand over time. Financial markets operate efficiently only when participants can commit to transactions with reasonable confidence that the risk of non-payment can be rationally judged and compensated for. Effective and seasoned markets pass this test almost all of the time. On rare occasions, they do not.
Fear, whether irrational or otherwise, grips participants and they unthinkingly disengage from risky assets in favor of those providing safety and liquidity. The subtle distinctions that investors make, so critical to the effective operation of financial markets, are abandoned. Assets, good and bad, are dumped indiscriminately in circumstances of high uncertainty and fear that are not conducive to planning and investment.