Globalization turns out to be more complicated than it first seemed. Young, dynamic economies can enjoy three decades of prodigious growth--and abruptly go into a tailspin. The transition from state-guided growth to transparency and free markets is trickier than a simple "big bang." And with increased interdependence comes the increased risk of contagion.

At this writing, there is a pause in the Asian flu. For the moment, the conventional line goes something like this: The fundamentals are solid. (Aren't they always?!) Japan is belatedly letting big institutions fail--a sign of overdue reform. The Asian financial quake gives the U.S. the leverage to demand salutary changes--deregulation, open markets, fiscal reform. And, anyway, Japan has the world's largest cushion of savings, diligent workers, and superb manufacturing. Ironically, the same people who were arguing just months ago that Japan was on the brink of deferred disaster now celebrate its resilience.

In this view, the revealed weakness of Asia contrasts with the towering strength of the U.S. The American economy, supposedly, has not just strong job creation, low unemployment, scant inflation, dynamic entrepreneurship, and flexible institutions. It also benefits from a flight-to-quality psychology.

The Pollyannas should get real. Thanks to the very globalization relentlessly promoted by the so-called Washington consensus, no economy is an island. And whether an economy is national or global, the recurring dilemma of capitalism endures: how to make its magnificent creative destruction tolerably stable and socially bearable.

HOW DEPRESSIONS HAPPEN. What troubles me is the certitude that there is a single, correct form of capitalism--which, by coincidence, is the Reagan-Rubin form--and that this is an opportune moment to impose it on Asia. All it takes, supposedly, is transparency, market access, and a big dose of austerity. This is all too reminiscent of the "Treasury view" (fiscal orthodoxy) that John Maynard Keynes criticized in the 1930s as needlessly prolonging depression.

Anyone tempted to whistle past the graveyard of Asian bank failures and overcapacity should reread the classic 1933 article by the economist Irving Fisher, "The Debt-Deflation Theory of Great Depressions." Fisher's insight was that depressions, as opposed to recessions, occur when a period of exuberance and high debt collapses into an unwinding of asset values and a contraction of credit, triggering a general deflation and a crumbling of mass purchasing power. Asia is not there yet, but it is uncomfortably close.

MULTIPLE MODELS. In the U.S., the Federal Reserve reliably acts to keep recession from turning into depression. But the Federal Reserve is not quite the world's central banker. The International Monetary Fund in 1944 was designed to provide liquidity in crises and to prevent troubled nations from exporting austerity. But lately, the IMF has mutated into an instrument of austerity. Jeffrey Sachs, an exponent of fiscal discipline but a critic of debtor's prisons, observes that in a financial panic, it is more important to restore confidence than to demand drastic surgery.

When my friend William Greider wrote One World, Ready or Not, he was ridiculed by economists for arguing that the world suffered from increasing overcapacity mismatched with wages that were insufficient to buy all the products. The economists knew better: Obviously, all that economic activity had to go somewhere. If workers were underpaid, then by definition investors were overpaid. And they bought products. Problem solved.

Well, it's now all too clear that Asian capitalism does face a glut problem. That, in turn, cascades into bad loans, banking collapses, and global glut. For years, current glib economic reasoning has left out institutional instability and the role of psychology in gluts and financial instability. Sure, economic activity has to go somewhere, but unsold cars still pile up on docks, bank balance sheets do turn sour, and panicky investors do start selling. As always, the weakest link in the whole affair is the financial system.

Contrary to the U.S./IMF line, there is more than one brand of capitalism. It's not yet clear how the different models of capitalism will coexist, who will serve as stabilizer and referee, or how the financial mandarins will be democratically accountable. But one thing ought to be clear: The system does not efficiently govern itself.

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