He hasn’t gone away you know…..

Hans-Werner Sinn replies to his critics in relation to Target 2 balances here.  Readers of this blog will undoubtedly draw their own conclusions.  At the heart of his fallacy is the conceptual  absurdity of separate regional credit policies in  a monetary union with perfect capital mobility.

22 replies on “He hasn’t gone away you know…..”

My take is that his argumentation is so poor, that mendacity is what we are left to conclude, take this , roughly true statement:

“The €340 billion are in fact a loan to the GIPS from the euro community, which, like any other loan, made it possible for them to purchase more goods and assets abroad that would otherwise have been the case. ”

Yes…as such the imbalance is indeed reflective of loans, though his conclusion that these loans must relate to imports is carefully hidden, and absent any supporting evidence.

Also his ambiguous statement of ‘the Euro community’ becomes clear in a manner that takes the biscuit:

“. A district that wishes to import more goods than it exports must receive private credit from another district or hand over marketable assets, and a district whose citizens wish to acquire net assets from other districts must export more goods than it imports . It is not allowed to fulfill its wishes by cranking up the money -printing press as in the Eurozone. ”

How many times has it had to be explained to him that THIS IS NOT MONEY PRINTING…. the only money printing is ELA, and this is arguably matched by collateral. Target2 is not a money printing system…Sinn is either an idiot, or liar…and given his academic accomplishments, liar seems more likely

I’m sorry but I don’t think his argument is absurd at all. What happened in Ireland was that the Irish government decided to bail out the banks. But the Irish government had no money. So it gave bonds to the banks and they then repoed them with the central bank for cash. As a result the Irish banks were able to meet demands from German and other banks for the money which they were owed.
This meant that ECB facilitated the Irish government bank guarantee, which otherwise could not have been met. This is not part of general credit policy. It is intervention to prop up the banking system.
It’s true this could not have happened if Ireland had not joined the Euro. Then, the Irish authorities could have used Punts but this would have led to an attack on the currency. Even if other countries and the IMF had given support, they would not have countenanced FX intervention on the scale required.
The sad thing is that Mr. Sinn’s intervention has led people to focus on the area where he is wrong and to deny the things where he is right.
He is wrong in suggesting that the net result of this has been a subsidy to Ireland. What has actually happened is the ECB has lent Ireland the money to lend or give to the banks to pay off other European banks to which they owed money.
That EUR 300+ billion which the Bundesbank is owed by the ECB actually ended up back in Germany and in the other countries which have been the recipient’s of the Irish government’s largesse in not imposing losses on those who lent without proper thought.

@David Blake – “What has actually happened is the ECB has lent Ireland the money to lend or give to the banks to pay off other European banks to which they owed money.”

I believe that was ‘the only game in town’ when this all kicked off – protection of banks in the core Euro countries aka protection of political careers. It would be a disaster for Merkel or Sarkozy if one (or more – perish the thought) of their big banks bit the dust on their watch.

Events in Greece are taking an interesting turn. A space to be watched this week/weekend. I fear that the most apt word is “unravel”.

@Desmond Brennan
Yes, it isn’t at the moment because the Irish banks owe the money back to the system.

Of course, when it is forgiven, that will be printing…

I read Prof Sinn’s original article and karl Whelans excellent rebuttal. I would contend again that Prof Sinn is being disingeneous. Perhaps I am misremembering but I recall that the issue of how any ECB loss would be dealt with (by % capital of each country) was not referred to at all in the original Prof Sinn article. That article put the entire target 2 Bundesbank balance at the feet of the Bundesbank.

Another issue I would contend with from this article:

The facts of the matter will perhaps become clearer if we bear in mind what the Target deficits of the GIPS countries, a hefty €340 billion by the end of last year, actually are. Essentially, they are the portion of the money created by the corresponding national central banks that was used for the net acquisition of goods and assets from other Eurozone countries.

That is not true. There have been deposit flights by the billions from peripheral banks to core banks, particularly German banks. These are only partially related to goods or asset acquisition.[ Unless of course one regards euros in Deutsche Bank as different from euros in AIB. One should not in a currency union. Right?]

Lets repatriate the deposits of Irish citizens and pension fund assets to find out the truth of this assertion. If prof Sinn has his way, we are heading back to individual currencies and capital controls anyway.

Well, well,
those ugly capital controls might not be as far away as we wish.

In an interesting Reinhart / NBER / IMF paper
they discuss how huge UK / US government debt was reduced in the past, without defaulting or really punishing capital taxes.

No police suggestions of course, just describing a little bit, in significant detail, how it WAS done berfore, tü tütü ……. LOL

Sinn is mistaken in many respects. Many of those have been mentioned before.

One dimension I haven’t seen anyone mentioning here is that a substantial part of the external financing to Irish-domiciled financial institutions was used to finance final demand outside Ireland. The prime example is Depfa ACS – fully German owned (by HRE), and assets entirely outside of Ireland, but domiciled in Ireland and accessing ECB liquidity through the CBI and hence contributing to the Target balances Sinn refers to.

re Rheinhart paper you refer to above: Just read the abstract.
Why would the author refer to a period using the words “financial repression”. Just a question.
Repression seems a strong word to use. What elements of the methods used is she referring to as being repressive in the normally accepted sense of that word?

I understand you very well. I did not promote or justify the paper. I just find it VERY interesting.

There is actually a lot to be said about this paper. Just one thing: the whole thesis would be a lot weaker, if you change the period 1945 – 1980 to, lets say, 1950 – 1975, excluding the immediate post war years, and the 1980 inflation episode. The first goes by “never let a good crisis go wasted”, if people are very happy or very scared, certain things can be implemented much easier.

Being on the authorlist of a few dozen papers myself, I actually do appreciate the subtleties of cited afffiliations, and sweet little innocent “data collector” Carmen popping up in certain places ….
gives me room for imagination

Poor Sinn is squirming and retracting and restating, and he looks so teutonically clever with that beard.

Where he is demonstrably wrong is in his comparison with the Federal Reserve system. The 12 Fed Res Banks operate similarly to Target2 but even more liberally. If the citizens of California lose complete trust with their banks and shift all their money to New York, the New York FRB simply deposits straight back with the Cali FRB. They are all branches of the one Federal Reserve. There is no question of the Cali district being unable to repay NY district, it would be like AIB insisting that its Kerry branch pay back money to its Dublin branch.

Target2 allows for total freedom of capital movement within the EZ just as the Federal Reserve performs the same function in the US.

Now the fact that Greece blew a lot of its fiscal deficit on a current account deficit has nothing to do with Target2, it is because Greece’s foreign lenders were prepared to continue to finance it.

Similarly if it transpired that Wyoming citizens had persistently overspent it will be because they were able to access private credit from outside the State but it will have nothing to do with the operation of the Federal money system.

Well put @BWII.

Does anyone know what the initial balance was when TARGET2 replaced IRIS and TARGET in 2007? Given that capital flowed into Ireland in the preceding ten years, I would expect Ireland to have had a large positive balance?

I have been studying this more. Sinn has really dug the hole deeper by invoking the US Federal Reserve system. There are 12 Federal Reserve District Banks. As Wiki explains this decentralised structure was set up in 1913 partly because of the inefficiency of communications then and partly to reduce the political sensitivity of a fully all Washington centralised system. But it was one system, the District Banks were merely branches. For example, California and Oregon are in the same District Bank. No way does California or Oregon see its economic/monetary success in any way dependent on the other, they are simply part of the same Federal District Bank for admin purposes.

American citizens can freely move their money between any bank in the US and whilst they might be concerned about the security of their own particular bank they have no interest whatever in the “security” of their particular Federal District Reserve Bank.

Sinn has got this completely wrong, and whilst he thinks he has squirmed away from the criticisms so correctly levelled by Karl Whelan there is no escaping this complete misunderstanding of the US monetary system.

New academic paper on TARGET2 published: ‘The economics of TARGET2 balances’
Ulrich Bindseil (ECB Economist)
Philipp Johann König (Technische Universität Berlin, Germany)
SFB 649 Discussion Paper 2011-035

In my view Sinn is two-thirds right (open target2 balances allow more negative current account balances in the Euro area periphery than would otherwise be the case; and these open balanxes are a risk to European, including German, taxpayers); and one-third wrong (open target2 balances do not imply less credit in Germany).

Whether you side with him or slam him depends on what parts of the argument you consider more important.

If I may, my full discussion of the Sinn hypotheses is here:


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