Korean bailout is just delaying the inevitable

With good reason we invest huge confidence in the institutions that police the world economy. For 50 years they tamed the forces of self-destruction inherent to free markets. As lenders of last resort they underwrote the international financial system.

What was a radical departure in the 1930s is now a central tenet of public policy. Individuals, companies and banks may go bust, but never again will whole economies be allowed to fail - in a global market we are, ultimately, all in the same boat.

The rapid spread of Asia's malaise reinforced this interdependence. Bailing out Indonesia, Thailand and South Korea was as much about containment as altruism.

History seems to support such enlightened self-interest. The 1930s' depression was deepened by begger-thy-neighbour policies in trade and finance. Central banks choking of credit deepened a spiral of deflation.

The International Monetary Fund was formed to prevent a repeat. To that end Asian nations came begging as capital flight emptied central bank coffers. Now, Korea threatens to test the long-established principle of multilateral assistance.

Perhaps, for the first time since the 1944 Bretton Woods deal some argue Asia's latest basket case should be left to sink or swim. This despite the risk of an international payments default stemming from vast overnight commitments to international lenders and US$20 billion in short-term debt due early next year.

In Washington the use of public money to bail out an economic competitor that borrowed too much is increasingly contentious. The post Cold War era means strategic imperatives that once glued the capitalist world together are reducing.