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Capital markets are crucial indicators of economic activity

Only because we use them as indicators of economic activity.

When stock markets plunge people panic and that panic is what causes economic instability. That's what causes issues. Economics is purely a product of human minds acting in unison or opposition.

I think it's the other way around, no? People panic, and then sell their equity.

I think it's both. That is, it's a feedback loop. Some people sell their stock, so the market declines, so more people sell their stock, so the market declines more, so more people sell their stock...

For this to happen, though, enough people must be thinking that the market is poised for a big fall, so they're on a hair trigger, ready to sell right at the start of the drop.

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