Beware what you say

Perhaps I should be more careful about what I say about the financial crisis. In Latvia, economist Dmitrijs Smirnovs was arrested for "for bad-mouthing the stability of Latvia's banks and the national currency, the lat. Investigators suspect him of spreading 'untruthful information,'" according to this article in the Wall Street Journal. In October Smirnovs "took part in a discussion organized by a small local newspaper, Ventas Balss. Predicting serious trouble ahead for Latvia, he said: "'All I can advise is this: First, don't keep money in banks. Second, don't keep money in lats.'"

The problem, of course, was the Smirnovs was correct:

After insisting its banking sector was healthy, Latvia last month took over the largest locally owned bank, Parex, to save it from collapse. After denying it needed aid from the International Monetary Fund, the government is now in talks with the IMF.

Finance Ministry officials acknowledge that secret police won't save the country from economic crises. But they do believe Security Police vigilance makes the public think twice before spreading uninformed gossip about banks.

"It is a form of deterrence," says Martins Bicevskis, Finance Ministry state secretary.

Arresting people for spreading rumors, or the truth, about the economy is an old Soviet practice. The Latvian officials are afraid of the effect of rumors on speculative flows of capital. But it is not clear that such policies are anything but counterproductive. The less information people have about the economy the more subject they are to rumors and fears.