Aug. 6 (Bloomberg) -- Greetings from Coolum, Australia, where APEC finance ministers just wrapped up a most illuminating meeting.

APEC refers to the Asia-Pacific Economic Consternation forum, errr, the Asia-Pacific Economic Cooperation forum. While it really does mean the latter, the former name better represents what the 21-member group has become.

Asia-Pacific nations like to think they work together. Yet if this year's finance ministers' meeting highlighted anything, it's that as much as Asia-Pacific nations say they're cooperating, they're standing very much alone.

It illuminated how the U.S. still blames Asia for saving too much and holding down currencies. Asians blame the U.S. for saving too little and relying too much on Asia's money. Japan criticizes China for an undervalued currency, while South Korea is stepping up criticism of Japan for the same reason. China is perturbed that it's being criticized at all.

APEC's gathering unfolded amid increasing volatility in global markets. One heard more consternation over who's to blame for imbalances than how to fix things. And Henry Paulson's decision to blow off the event was a bigger problem than the U.S. Treasury secretary may realize.

``A lot of this market volatility is about subprime- mortgage-market contagion from the U.S.,'' Diwa Guinigundo, deputy governor of the Philippine central bank, told me in Coolum.

Asian Irony

It has to be one of the biggest ironies in global finance. Ten years ago, it was contagion from Asia imperiling the global economy. For months after Thailand devalued its currency in July 1997, U.S. officials reassured markets that Asia's woes were containable. Once the Dow Jones Industrial Average began plunging several hundred points in a day, investors knew better.

Eerily familiar noises are coming from Paulson these days. In Beijing last week, he said the U.S. economy is ``healthy'' enough to weather ongoing market declines. One hears similar reassurances from top economic officials near and far.

Yet Paulson's confidence in an economy facing the worst housing recession in 16 years and massive current-account and budget deficits isn't reassuring. It smacks of deepening denial at a time when policy makers like Guinigundo say ``the risks of contagion can't be downplayed.''

Asia has come a long way since 1997, as Asian Development Bank President Haruhiko Kuroda explained in Coolum. Banks are far more stable, currency reserves have been amassed, and governments are modernizing and integrating financial systems.

Decoupling From U.S.

``There are many risks to consider, but Asia seems able to handle it,'' Kuroda said.

Asia's post-crisis recovery is a work in progress, though, and one shouldn't overstate the extent to which Asia has decoupled from the U.S. economy. While Asia's rapid growth and booms in both China and India mean it's less reliant on the U.S., the region isn't ready to live without U.S. demand.

The hedge fund angle also offers another bit of irony. In 1997, they were blamed for the speculative attacks on Asian currencies.

By 1998, the resulting volatility even claimed a weighty casualty: John Meriwether's Long-Term Capital Management. Yet memories are short in the age of financial globalization and the years to follow were banner ones for aggressive investors. Asia alone has seen an exponential increase in the number of hedge funds since 2002. Now that trend is being tripped up not by events in Asia, but the U.S.

A New Contagion

Australia is on the front lines of how problems in the U.S. are spreading to Asia. On Aug. 2, shares in Macquarie Bank Ltd. fell the most in five years after Australia's largest securities firm said investors in some of its funds may lose as much as 25 percent of their money. Taiwan Life Insurance Co. stock had its worst week in over three years amid hedge fund losses.

It's one thing for Bear Stearns Co.'s hedge funds to get slammed by the subprime mess; it's another for casualties to begin piling up a world away. The Morgan Stanley Capital International Asia-Pacific Index plunged 3.9 percent in the five days ended July 27, the worst weekly drop since July 2006.

``The correction is coming about because of weakness in the U.S.,'' said Australian Treasurer Peter Costello. ``It illustrates how interconnected the world is.''

It's a breathtaking role reversal. Just as Asia downplayed the odds of its 1997 contagion oozing around the globe, the U.S. claims its problems are containable. While that's possible, the concerns of investors like Jeremy Grantham, chairman of Grantham, Mayo, Van Otterloo & Co. and Jim Rogers, chairman of Beeland Interests Inc. are worth noting.

Consternation or Cooperation

Only now are investors waking up to how global risk has been mispriced in recent years. Markets became too greedy in selling collateralized debt obligations and financing leveraged buyouts, and investors underappreciated the hazards.

Costello said APEC talked about ``what can be put in place to ensure that these imbalances don't work out in an even more radical readjustment.'' That would be reassuring if APEC had come up with something concrete. Instead, we got boilerplate -- and hollow -- calls for flexible exchange rates.

There was no demand for Japan to reduce incentives for the so-called yen-carry trade. Borrowing cheaply in Japan and investing the funds in higher-returning assets elsewhere has fueled many of today's riskiest hedge-fund trades. Yet Japan is reluctant to let the yen rise, and global policymakers continue to wimp out on demanding it.

Amid so many risks, it would be comforting to get a bit more cooperation than consternation out of APEC officials.

To contact the writer of this column: William Pesek in Coolum, Australia, or through the Tokyo newsroom at wpesek@bloomberg.net

Last Updated: August 5, 2007 21:07 EDT