Investors panicked, financial markets plummeted and interest rates soared as authorities struggled to staunch the flow of money. Fortunes were lost and life savings evaporated in hours, even minutes.
This nightmare scenario could be a flashback to the great stock market crash of 1929, but it could just as well be a description of what happened to Mexico in 1982 and again in 1994. It could also be applied to the worst days of the Asian financial crisis in late 1997 and early 1998.
There was little new about the way investors took fright at the Asian meltdown. What is new is a growing sense among the worlds economic policy makers that free flows of capital around the world, hailed by current doctrine as the life force of the worlds globalising economy, may be getting out of hand.
I believe that what is being referred to as the architecture of the international financial system will need to be thoroughly reviewed and altered as necessary to fit the needs of the new global environment, US Federal Reserve chairman Alan Greenspan said earlier this year.
Pieter Bottelier, senior economic adviser at the World Bank, went further at a conference in Paris.
Only last September, the International Monetary Fund won backing from its members for a statement that free capital flows, supported by sound economic policies, were key to the worlds economic health.
Its chairman Michel Camdessus has since said, however, that the Asia crisis was not triggered by too much liberalisation, but rather by perverse liberalisation.
Even the Organisation for Economic Co-Operation and Development, a bastion of free-market orthodoxy, said in a report this month that legitimate questions exist as to whether the Asia crisis could have become so severe if institutions had respected the risks inherent in lending to emerging market economies.
The issue is expected to come up at a meeting of the IMF and World Bank in Washington on April 13 to 17 of finance ministers and central bankers from developed and developing countries.
But despite the will to do something, there is little agreement on what the problem actually is, let alone on how to fix it.
Each day, more than a trillion dollars worth of capital changes hands, in anything from foreign exchange trading to long-term loans for road building to cash deposited overseas by corporations planning to build factories.
The transfers have spurred economic growth by lowering the cost of capital, complementing domestic savings and boosting investment.
They also offer savers in developed economies investment opportunities, allowing them higher yields in countries with better growth potential than their own.
In 1996 net private capital flows into the developing world totalled $234 billion, a huge jump from $160.9 billion the year before, according to data from the OECD.
The private flows make up the vast majority of the total net resource flows in 1996, which totalled $303.1 billion.
John Maynard Keynes said these factors could not be explained and called them animal spirits to highlight their volatility. In a recent speech in Manila, World Bank Chief Economist Joseph Stiglitz drew a parallel between Keyness theories and Greenspans comment that irrational exuberance had infected stock markets.
Irrational or animal, individual investment decisions that collectively affect the flows of billions of dollars can have immensely damaging effects on unprepared economies.
There can be collective irrationality even when individuals are acting rationally because there are external factors, said Stephany Griffiths-Jones, professor of economics at the University of Sussexs Institute of Development Studies.
What makes sense for you and me individually could be irrational if everybody does the same thing at once. Excessive capital flows can lead to overvalued exchange rates, growing current account deficits and inflation.
But Griffiths-Jones argues that an even greater risk than the amount of capital on the move is the possibility that the money can flow out just as quickly as it rushed in and lead to a currency crisis with catastrophic effects.
No one is suggesting going back to protectionism. A summit this month of European and Asian leaders, while specifically blaming currency speculators for aggravating the crisis, reiterated their commitment to open markets.
One former central banker suggested that the international community should perhaps consider liberalising only capital outflows initially in some developing countries rather than opening them up to capital inflows which might become excessive.
Other experts have suggested that encouraging long term inflows instead of so called hot money would help enormously. Camdessus, for example, said Asia had started the wrong way by opening up to short-term capital flows first, describing these as the most explosive.
Others are discussing the imposition of some sort of reserve requirements on lenders investing in emerging economies. The loss of earnings from the reserves would be compensated by higher investor confidence that would attract more money.
Another idea making the rounds is for the IMF to be granted the power to go public with negative assessments of a country.
But some say such publicity could serve to spark exactly the kind of panic regulators are trying to avoid.
Public disclosure is certainly dangerous, but talking privately to regulators in lender countries may be an answer, said Stephen Harris of the Paris-based OECD.
A small tax on transactions, proposed by economist James Tobin, is considered impractical by almost everyone.
Governments couldnt introduce a tax of the sort that Tobin advocates, there would be leakages, Harris said. It would be a giant sieve.
MAIN PROBLEM LIES IN THE COUNTRY, NOT THE FLOWS
If there is consensus on anything, it is on the need for more transparency and better regulation, particularly of the financial sector, in emerging economies that open themselves to capital flows.
The Asia crisis is not a reflection simply of capital flows, said Harris. It is a reflection of bad economic flows and bad regulation.
Harris also faults authorities in the west who failed to notice the rash of suspect lending.
National authorities dont have to be involved in tracking capital flows but if their banks are loading up with debt from badly regulated countries, they have a responsibility to intervene, he said.
While some reject outright the idea of any intervention in the market and say the authorities could never get the right balance between freedom and regulation, others warn that failure to act could have serious consequences.
If the creditor countries dont put some constraints on their lenders were going to face more crises, said Jerome Levinson, professor of international law at American University in Washington.
In the meantime, he said, Were living in a fools paradise.
