Tuesday, December 2, 2008

Pessimistic Economic Forecasts: Latvia’s Radical Solution

Latvia locked up a pessimistic economist for creating public distrust of the economy. Public outcry resulted in his release. It raises interesting questions that I explore in this article.
The stock market is notoriously temperamental. A rumour of health problems in high places can spark disturbing market fluctuations. If it is proven that someone attempted to influence a stock price with disinformation, that is a serious criminal offense.
The Wall Street Journal had a story about how the Latvian government dealt with an economist bearing bad news. According to a story in yesterday’s Wall Street Journal, “Hammered by economic woe, this former Soviet republic recently took a novel step to contain the crisis. Its counterespionage agency busted an economist for being too downbeat.
“All I did was say what everyone knows,” says Dmitrijs Smirnovs, a 32-year-old university lecturer detained by Latvia’s Security Police. The force is responsible for hunting down spies, terrorists and other threats to this Baltic nation of 2.3 million people and 26 banks.”
The story took on a serious twist with the news that the economist was detained for two days, his computer confiscated and barred from leaving the country.
Latvia has a thin resume of democratic experience, having spent fifty years under either Nazi or Soviet occupation. Unlike the United States , theirs is a small economy. Their ship of state is like a rowboat weaving its way through a sea of huge tankers. It has managed to go well into its second decade with a robust democracy and a free press. Even the detention of Smirnovs the economist was widely reported, almost negating whatever effectiveness they may have hoped to garner from his detention.
Despite a firm commitment to democracy, the decades Latvia spent under Soviet rule seem to have had a formative influence in its behavior towards its citizens. Detaining an economist seems harsh by American standards. It is hard to applaud such action but it raises interesting questions.
On the one hand, there is the danger of figuratively yelling fire in a crowded theatre, of causing real monetary damage through poorly founded speculation. Conversely, there is the possibility that dysfunctional and corrupt corporate behavior could continue to wreak havoc if it is not caught by a vigilant public. A perfect example of this is the banking crisis in the United States brought about by subprime loans to unqualified borrowers.
Latvia has good reason to be touchy about economic questions. According to the Wall Street journal,“Latvians have good reason to be jumpy about their banks. In 1995, depositors lost upwards of $800 million when the country’s biggest bank, Bank Baltija, collapsed and nearly felled the entire banking sector. Its senior executives went to jail.”
It should be noted that Latvia does not have FDIC type insurance for bank deposits like we do in the US. A run on the banks would have disastrous consequences for depositors. An erosion of confidence in banks could dry up credit needed for economic growth.
Democracy feels good to Latvians. For the most part it goes hand in hand with prosperity. But Latvia has also suffered from a shrinking economy. According to the Wall Stereet Journal,“Latvia’s economy took a nose dive this year. After enjoying the highest growth rate in the European Union, which it joined in 2004, the country is now in deep recession. Its economy shrank 4.2% in the third quarter.
Latvians are clearly trying to balance democratic political values with considerations of economic well being.
A solution to the collision of stable economics and free speech would be to make economics as popular as soccer. A public that is concerned and well informed about economic matters would ask critical and discerning questions about economic rumours. A financial elite that has to answer to an educated public is likely to stay honest and prudent. suppressing information gives it more credence.
Even though Latvia’s legal system is different from ours, the difficulties they face resemble ours. Maintaining a commitment to free speech and democratic values in times of economic crisis takes political maturity. Laws restricting free speech, from America’s proposed “fairness doctrine” to Latvia’s lockdown of a pessimistic economist should be approached with extreme skepticism. It is far easier to protect existing freedoms than to regain those that have been lost. Sphere: Related Content

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