SYNOPSIS: Thinks about the possibility that the Asian Crisis was manufactured.

Fritz Lang's classic 1922 movie "Dr. Mabuse, the Gambler" begins by showing the arch-villain of the title at work: masterminding robberies, fomenting riots, practicing psychoanalysis, and - of course - engineering market panics. Economists knew even then that the economic chaos of Weimar Germany had little to do with market manipulation, and was basically the fault of a weak government that printed money to cover its deficit. But at the time the figure of the evil speculator was a powerful cultural icon; everybody believed that such men existed, and that they were the source of many of the world's ills.

Nor was this belief entirely unfounded. Financial markets in the late 19th and early 20th centuries were rife with dirty tricks: "corners", in which a group of investors bought up most of the available supply of a commodity, then drove up its price; "pools" that tried to drive stock prices up or down, in the hope that naive investors could be duped into buying high or selling low; and so on. Efforts to prevent market manipulation were a key component of Progressive Era legislation.

In modern times, however, the evil speculator's hold on the popular imagination has waned. Put it down partly to free-market ideology. Also, after 15 years in which stock prices have almost always gone up, those who play games in the market are more likely to be seen as creators of value than as disreputable exploiters. Anyway, today's financial markets are so vast that it seems hard to believe that any individual or group could have the power to manipulate asset prices - surely any attempt to drive those prices far away from fair value would be frustrated by other investors, who would rush in to seize the resulting profit opportunity. When the occasional accusation of financial conspiracy is heard - when, for example, Malaysia's Prime Minster blames his country's problems on the machinations of Jewish speculators - the reaction of most observers is skepticism, even ridicule.

But even the paranoid have people out to get them. Little by little, over the past few years, the figure of the evil speculator has reemerged. George Soros played a definite role - though probably not a decisive one - in the forced devaluation of Britain's pound sterling in 1992. In 1996, it was revealed that a Sumitomo executive had been rigging the whole world copper market, with considerable initial success. In both cases little harm was done: devaluing the pound turned out to be a pretty good idea, and Mr. Hamanaka overplayed his hand, losing rather than making billions. But the possibility of market manipulation had nonetheless reentered serious discussion.

And then came Hong Kong. Back in August, when the city-state's authorities began massive purchases to support share prices, many outsiders condemned it as an outrageous violation of free-market principles. But financial officials in Hong Kong claimed that they were fighting a deliberate conspiracy against the city's economy. As Finance Secretary Donald Tsang puts it in a widely circulated letter, "Regular patterns [of currency sales] suggested a co-ordinated manipulative play involving very large funds" (rumored to include Soros' Quantum Fund and Julian Robertson's Tiger Fund, among others) "accompanied by shorting of stocks and futures ... [t]hese plays were designed to create panic conditions for the shorting positions to be profitable. If left unchecked, such manipulative ploys would have resulted in panic selling in the stock market ..." In short, they were dealing with a cabal of speculators.

How did Dr. Mabuse manage to escape from the video vault? One answer is that deregulation and information technology have combined to make financial markets more "liquid", that is, made buying and selling easier, than ever before. As a consequence, aggressive speculators are able to leverage themselves - to take bets far larger than their capital. Long Term Capital Management - the hedge fund whose de facto failure rocked markets a few weeks ago - apparently leveraged a few billion dollars of its own money into more than a trillion dollars of assets. That's about four times as large as the value of the whole Hong Kong stock market. Suddenly the idea that a handful of big players could manipulate national financial markets doesn't look that implausible after all.

Another answer is that globalization has created loopholes in the rules. Tsang reports that "rumors began to circulate in the media about imminent devaluation of China's Renminbi and the de-linking of the Hong Kong dollar" - which is, despite the passive voice, clearly an accusation that the hedge funds involved deliberately spread those rumors in order to profit from their short positions. If someone sold stocks in a U.S. company short, then spread rumors about problems with its products and feuds among its managers, he would soon face criminal prosecution. But as far as anyone can tell, it is perfectly legal to sell a country short, then spread damaging rumors about its future policies - or if there is a law against it, it isn't enforceable.

Perhaps most important, when economies rather than mere companies are at stake, the comforting notion that it's hard for speculators to artificially depress the price of an asset, because other investors will rush in to take advantage of the bargain, becomes doubtful. The reason is that speculation against an economy can sometimes produce a crisis that justifies the market's low opinion. If Hong Kong's currency and political system remain stable, stocks in its companies will be worth a lot; but if a run on the currency causes that stability to wobble, they will be worth much less. So faced with a sufficiently large play against Hong Kong, those not part of the conspiracy may not rush in to buy cheap Hong Kong stocks; they may conclude that the play against the economy is on the verge of success, and sell all the faster. Or at least that's what Hong Kong's government feared; and given the way this global financial crisis has spread, who can say with confidence that they are wrong?

Of course, maybe it doesn't matter what Donald Tsang, or the public in general, think; maybe the free movement of international capital is too important to restrict, and occasional manipulation of their markets is simply part of the price small countries must pay. But my guess is that the days of the big international speculator are numbered. After all, the good guys always get Dr. Mabuse in the end.