Thursday, April 23, 2009

In for a penny 

While working in the Ukrainian central bank in 1996, I was witness to several practices that I took to be vestiges of the old communist order. Old habits die hard, they say. One was a bizarre ruling from the prime minister that directed the central bank to count any loan made to a coal mining company as if it was bank reserves. A bank's reserves cannot be lent out, and it can be viewed as a tax on bank activity. It was quite clearly directed lending from the government to a favored state enterprise (there were and still are relatively few private mines) and to its workers, who constituted a major portion of the prime minister's political base.

I thought this open favoritism couldn't happen here. But:
James Kwak wonders why banks receiving money from government should be allowed to have any say in relief efforts. But government purchases goods and services from everywhere, as the second story shows. If doing business with government means succumbing to Leviathan's heel, is there any effective limit on government power? Or is that limit reserved for our handling of terrorists and pirates?