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. Such circumstances, were they generalized and persistent, would be wholly inconsistent with the functioning of sophisticated economies supported by long-term capital investment. It's an amazing thing about fear.
People get scared.
There are many hedge funds, many derivatives. There will be fewer in a year. There will be none in two years. This is just the first phase of the crisis. Y2K has yet to hit the public's consciousness.