SYNOPSIS:Stock markets in Asia are soaring, and investors are flocking back. Did the region learn anything from the financial crisis?

Two years ago, a nasty virus emerged in Bangkok. It proved highly contagious, spreading rapidly through Asia and beyond, often claiming seemingly robust economies as victims, and for a while it looked as if it might become a global pandemic. But there have been no new reported cases in the past few months, and most of the original victims seem to be past the worst. And like anyone who has been very sick and starts to feel better, they feel relieved, even euphoric--though they are still a long way from full recovery.

But it's still far too early to break out the champagne. For one thing, Asia's turnaround remains a partial thing. South Korea has recovered faster than anywhere else, and its economy might grow as much as 5% this year; yet even if it does, output will still be 14% below the pre-1997 trend line. >Japan, whose economy is bigger than that of all the other troubled nations put together, has yet to show any convincing signs of a turnaround, and almost everyone expects the unemployment rate there to keep rising even if GDP stops falling. China has managed to keep growing throughout the crisis, but it is subject to heightening financial strain.

And if the sense of imminent doom that hung over the region last summer has abated, that is not entirely a good thing. For when you come down to it, Asia has not emerged from this crisis with any clear idea about how to avoid the next one. None of the vulnerabilities that made the great Asian crisis of 1997-98 possible has disappeared, and there is every reason to believe that Asia has emerged from the crisis with its long-term prospects far less promising than they had seemed only two years ago.

But let us begin by trying to understand what went wrong in the first place.

Pundits who want to sound judicious are fond of warning against generalizing. Each country is different, they say, and no one story fits all of Asia. This is, of course, silly: all of these economies plunged into economic crisis within a few months of each other, so they must have had something in common.

In fact, the logic of catastrophe was pretty much the same in Thailand, Malaysia, Indonesia and South Korea. (Japan is a very different story.) In each case investors--mainly, but not entirely, foreign banks who had made short-term loans--all tried to pull their money out at the same time. The result was a combined banking and currency crisis: a banking crisis because no bank can convert all its assets into cash on short notice; a currency crisis because panicked investors were trying not only to convert long-term assets into cash, but to convert baht or rupiah into dollars. In the face of the stampede, governments had no good options. If they let their currencies plunge, inflation would soar and companies that had borrowed in dollars would go bankrupt; if they tried to support their currencies by pushing up interest rates, the same firms would probably go bust from the combination of debt burden and recession. In practice, countries split the difference--and paid a heavy price regardless.

Was the crisis a punishment for bad economic management? Like most clichés, the catchphrase "crony capitalism" has prospered because it gets at something real: excessively cozy relationships between government and business really did lead to a lot of bad investments. The still primitive financial structure of Asian business--too little equity, too much debt and too much of that debt consisting of soft loans from accommodating banks--also made the economies peculiarly vulnerable to a loss of confidence. But the punishment was surely disproportionate to the crime, and many investments that look foolish in retrospect seemed sensible at the time. After all, suppose that the United States, which currently is pulling in overseas money at the rate of about $300 billion annually, were to see that inflow suddenly become a trillion-dollar outflow (which, relative to the scale of the economy, is what happened to Asia's crisis-hit countries). How solid would America's financial system look?