On my second serious attempt at a fortress, I decided it would be neat to colonize the underground, and so I did, founding a quaint little town atop a cavernous lake. It lasted almost a year.
Toward the end of the downward spiral that was Blackale, a flying fell beast infiltrated the palace through the gaping pit of a magma forge, and descended upon the dwarfs. An "epic" battle ensued, in which the fell beast just sort of stood in the middle of the grand hall, waiting for confused and frightened cats and children to pass by, and swiped their heads off one by one. Finally, the ragtag militia squadrons brought down the beast, but were unable to restore order to the halls. Suddenly, it appeared that unsteady factions were breaking out right and left, and dwarves were aimlessly slaughtering each other in rage. The sheriff made quick work of transgressors, but that only seemed to make things worse.
So, when the going gets tough, how to the tough get going again? I've tried prisons (I think), placing cages and designating them as pits, but they never seem to be used, and he wiki doesn't give any specification as to how this designation is done. Furthermore, I've read that even with prisons, dwarfs just become exponentially more unhappy while caged, and that the only viable method of "rehabilitating" them is through more micromanagement than I am willing to do to keep well-behaved dwarfs happy.
So, could anyone who is willing please offer me (and the rest of us who keep losing fortresses exclusively to this) advice on how to deal with the fortress-breaking decline of morale that takes place at a pin drop?