Remarkable story in today’s Wall Street Journal, front page, December 1, 2008, about a Latvian economist arrested and held for several days – not finally charged – for expressing pessimistic sentiment about the stability of the Latvian financial system:

How to Combat a Banking Crisis: First, Round Up

the Pessimists

 

Latvian Agents Detain a Gloomy Economist; ‘It Is a Form of Deterrence’

I have stuck the headline in here as it pretty much says it all.  I understand the concern that rumors can take a whole financial system of a country down the drain very quickly.  Still, if the system were sufficiently transparent (Cf. USA financial system via derivatives, not) presumably this would not be so much a problem.  And talk about shooting the messenger:

RIGA, Latvia — 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.

Now free after two days of questioning, Mr. Smirnovs hasn’t been charged. But he is still under investigation for bad-mouthing the stability of Latvia’s banks and the national currency, the lat. Investigators suspect him of spreading “untruthful information.” They’ve ordered him not to leave the country and seized his computer.

Finance is a highly touchy subject in Latvia, one that the state tries, with unusual zeal, to shield from loose tongues. It is a criminal offense here to spread “untrue data or information” about the country’s financial system. Undermining it is outlawed as subversion.

So, when the global financial system began to buckle this autumn, Latvia’s Security Police mobilized to combat destabilizing chatter about banks and exchange rates. Agents directed their attention to Internet chat rooms, newspaper articles, cellphone text messages and even rock concerts. A popular musician was taken in for questioning after he cracked a joke about unstable Latvian banks at a performance.

Just one problem: Much of the speculative buzz now turns out to ring true.

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.

Mr. Smirnovs says he will certainly be “more careful” about voicing his opinions in the future. But he scoffs at the use of security agents “as a medicine that only makes people more worried.” Until his detention, his bleak view of Latvia’s financial prospects was known only to his students and readers of small newspapers in his hometown of Ventspils.

“Now everybody knows who I am and what I think,” he says.

The ingredients of Latvia’s troubles are much the same as elsewhere: a credit crisis, a slump in property prices and a severe economic slowdown. But in a tiny nation long wary of big neighbors, primarily Russia but also Sweden, economic woes are never just about money.

“We are a small country, and panic would have very grave consequences,” says Teodors Tverijons, head of the Association of Latvian Commercial Banks. Preventing uninformed gossip, he says, is a “matter of state economic security.”