What a difference a global financial panic makes. In slumping Hong Kong, once an icon of free markets, "speculators" who dump stocks may be thrown in jail. In recession-plagued Malaysia, which has banned trading of its currency, authorities roam the streets looking for black markets in foreign exchange. Half a world away, Russia is virtually bankrupt: officials have reneged on debts to foreign lenders, the ruble is all but worthless and the stock market has collapsed. "The global capitalist system that has been responsible for our remarkable prosperity is coming apart at the seams," says financier George Soros, who has lost $2 billion on investments in Russia over the past year.

Most Americans and people around the world will join Soros in the losers' column if the trend away from the free movement of capital continues. It is already sapping the profits of even the most competitive U.S. multinational firms, like Boeing and Citicorp, whose stocks are widely held in the retirement accounts of U.S. workers. And if more and more countries manipulate their capital flows and currencies for competitive advantage--as they did on the cusp of the Great Depression--the threat could spread to U.S. jobs.

Yet the temptation to meddle grows. Just as foreign funds largely financed the boom in Malaysia and its Asian neighbors, so the exodus of foreign investment has accelerated the crash. But while the Sept. 1 freeze that Malaysia imposed on the trading of its ringgit will prevent more funds from fleeing the country, it will also keep sorely needed foreign capital out. "I seriously doubt that we will invest in Malaysia for at least the next several years," says Dale Griffin, who manages a $4.7 billion international portfolio for the AIM group of mutual funds. "What Malaysia did was a real turnoff to us."

The appeal of controls to leaders like Malaysian Prime Minister Mahathir Mohamad--who took his cue from a recent article in Fortune magazine by M.I.T. economist Paul Krugman--could prolong the financial crisis that has spread from Asia to Russia to Latin America and hammered Wall Street stocks. Controls "might look good on a theoretical basis," says Thomas Mayer, managing director of Goldman Sachs in Frankfurt. "But on the ground they become pervasive. Investors would feel the rules of the game changing under their feet." Even Krugman, in a follow-up open letter to Mahathir in Fortune, remarked, "I'm worried that your approach may be tending toward the draconian." Standard & Poor's would agree. The credit-rating agency last week downgraded Malaysia's long-term debt to one notch above junk status.

So far, no country has rushed to follow Malaysia's lead. But Western experts say Russia could be the next to impose full currency controls. Already, says Bill Browder, American founder of the Hermitage Fund in Moscow, "bank accounts are frozen, treasury bills are frozen, wires are frozen. No one has any cash."

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