Next?

Remember the domino theory? An Eisenhower-era theory, it held that if one Asian country succumbed to the communist scourge, the rest would tumble like dominoes.

Now discredited, it once justified United States meddling in the region, and it may be back, with capitalism as the dominant force.

The latest chips in its path are some mighty important US allies - South Korea and Japan, with problems serious enough to pull equal rank with Iraq in holding the attention of US administration officials.

Free markets, while easing poverty in countries from the Philippines to China, will tolerate only so much inefficiency. And the penchant of Asian governments for propping up shaky banks and overbuilding has become intolerable.

Thailand fell first, in July, followed by Malaysia and others. Now comes a test of the standing power of South Korea, with the world's 11th-largest economy, and Japan, with the third.

Korea, on Friday, sought $20 billion from the International Monetary Fund (IMF) to help an economy beset by bank and corporate failures.

Also last week, Japanese regulators allowed the big Hokkaido Takushoku Bank to fail and signaled similar action for giant Yamaichi Securities. Other failures seem likely.

Here's the worst-case domino scenario. South Korea's condition worsens despite an IMF rescue. Banks and companies close. Foreign investors flee. Consumers and businesses stop spending, squeezing the economy into recession.

And Japan feels the pinch, since its companies and banks invest heavily in South Korea.

Keep in mind that balance sheets at Japanese banks already look like the McCaughey's future food bill (They're the Iowa parents who now multiply everything times seven), a lot of money for something very soft and very disposable.

The banks still suffer from real estate loans made during the 1980s bubble economy, and they don't want to see their Korean loans floating towards the same bed of nails.

The impact could pull the Tokyo stock market down to precarious levels.

A Catch-22 relationship exists between Japanese banks and the Tokyo stock market. If the banks get in more trouble, the stock market will decline. If the stock market declines, the banks will get in more trouble because they are such huge investors in the market.

The magic market number, say analysts, is 14,000 on the Nikkei 225 (the main Tokyo market index). Right now, it hovers around 15,000 and the economy apparently lacks the punch to push the market higher.

If these Korean and Japanese dominoes fell, the clatter would certainly shake up an already shaky US stock market, and perhaps bring on a global recession.

That's the worst case. The middle road suggests something less dramatic.

The Japanese government wins no one's praise for its handling of such problems, choosing to keep wobbly banks standing rather than move aggressively to close them down.

But it needn't be brilliant to be successful. Regulators may be able to muddle through problems one at a time. Band-Aids and bailing wire may not look pretty, but they holds things together. As David Francis points out in his column to the left, other bailouts have worked, and South Korea, like other Asian economies, is fundamentally OK. An IMF rescue for Korea amounts to a partial rescue for Japan.

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