We have nothing to fear but panic itself

Financiers are not immune to mass hysteria - in fact, they are unusually prone to it - and psychological channels are hugely important in the spread of financial panics. Bankers and investors are not so much speculative wolves acting on their finely-honed calculations as greedy sheep panicking about being left behind by the rest of the flock.

Still, there comes a point when a panic in the financial markets becomes too serious to dismiss as being all in the mind, and the sudden collapse in the Hong Kong stock market following the collapse of one of its banks suggests that upheaval in Asia has got to that point. There is no doubt that it is going to cause a lot of real pain in the former Tiger economies.

The question now is whether this will become a global crisis as well as an Asian crisis? And if so, what shape is it going to take? The answer is that the crisis probably is going global, but in unexpected ways.

There is no shortage of Chicken Lickens running around at the moment, in the City and the press, reaching for words such as "crash", "slump" and "meltdown". These are the people who prove that it doesn't take brains to jump up and down, just legs.

It is essential to remember that it is possible to tell Asians apart. Two countries - Japan and China, including Hong Kong - make up a fifth of the world economy and matter crucially to all the rest of us. Japan is in the throes of a truly awful banking crisis with many of its financial institutions bankrupt. This has been true all through the 1990s, and the Japanese government is only just biting the bullet of using taxpayers' money to weed out the duff banks and bad loans.

Luckily, Japan can afford this. It is a very rich country with a strong industrial base. Its corporations are profitable, its people wealthy and its crisis containable. It can probably ride out the collapse of confidence.

Hong Kong by itself is in a similar position. Its economy is fundamentally sound, although it is a far smaller place looking very exposed to the chill winds sweeping the region. China is another matter. Although information is scant, its banking system looks pretty shaky and it does not have the cushion of prosperity that might tide it through a crisis. A question mark hangs over its ability to stay insulated from the turmoil.

The other afflicted Asian countries, especially South Korea, are already in an utter mess. Much to everybody's surprise, after a decade's worth of hype about this dynamic region, it turns out that its companies have scarcely ever made a profit and its people's increased prosperity has been bought on tick. The bill is now overdue and there seems no end in sight to the downward spiral of confidence in their financial markets.

Luckily for us, although Korea is - or was - a big economy, it's nowhere near as big as Japan. Its GDP last year was equivalent to about five times Shell's sales, for example. So any spillover is unlikely to come mainly through real economic channels.

We have had an exaggerated view about the importance of Asian economies to the rest of us. True, Japan has been a big investor in the UK, but last year it was only ninth in importance, behind several smaller countries, including Norway and Australia. British exports to Korea have grown rapidly, but in 1996 it still accounted for less than 1 per cent of the total. Particular companies will suffer because of the impending Asian recession. But more important will be the potential financial panic effects.

These too need to be kept in perspective. For more than a year many experts have thought that shares on Wall Street have soared beyond any reasonable value and could fall severely before they started having real repercussions. In the judgement of Stephen Lewis, one of the City's most experienced analysts: "The first 2,000 points of any decline in the Dow Jones index would be not much more than froth."

However, he and other pessimists now reckon the current crisis has the potential to become, for the advanced economies, worse than the Latin American debt crisis of the early 1980s and worse than the mid-1970s oil crisis, the two most serious in recent memory. The reason is globalisation, the greater interconnectedness of the world's financial system alongside the reduced influence of governments on financial markets.

In the 1980s the Latin American governments owed money to US banks. The American government was able to broker an orderly resolution to the crisis by leaning on a handful of big banks. In the 1990s, private sector Asian companies owe money to a host of banks and investors in many countries, including each other. One default on a loan can have bigger and bigger knock-on effects as it gets amplified through the world financial system.

The Americans are trying to take on the leadership role in resolving the present crisis, especially in Korea, given its strategic importance. But the US seems very unlikely to persuade large numbers of foreign investors to put any money into economies that have turned out to be built on the sands of corrupt politics and whose officials are showing scant sign of humility in the face of the mess they have made.

Besides, the US makes an implausible rescuer for Asia. For America is the world's biggest debtor nation, kept afloat in recent years by Japanese investment in its government bonds and its industry. Beyond the immediate concern about how long this financial crisis is dragging on, its biggest impact on the rest of the world could well prove to be the withdrawal of Asian funds from countries such as the US that like to spend rather than save. If foreigners are going to stop investing in Asia because of a cataclysmic loss of confidence, Asian money will eventually return home to resolve the economic crisis.

That means the world's low savers, the ageing advanced economies, might be faced with a longer-term slowdown in growth because Asia's dynamism has fizzled out. Worth worrying about? Yes - but not worth panicking about; economies have a habit of adjusting to this kind of slow, tectonic trend.

Meanwhile, the biggest danger is that posed by investors' own ovine psychology, feeding the stock market frenzy for no good reason at all.