If you don’t understand, its because it makes no sense. Don’t worry about it.

Ta very much. A masterClass …

http://www.youtube.com/watch?v=6dMOk4EQybQ

Brownbag films. Class.

As such my understanding in EUR to EUR terms is that Target2 will not increase nett money supply (merely usage), which is why I’m curious about effects of another currency

(anyone got a link to a recording?)

As to whether you’re trying to defend the good Professor, I’ve read a lot of blog comments and I know how people interpret language such as “Sinn points to this he makes a perfectly fair point” and “Sinn is also right, btw.” But I’m happy for the clarification.

On the main point, even if you think I’m being “compulsive” I think it is important to address Sinn’s claims that we are facing the prospect that “the European Central Bank will lose the direct control over the German economy that it used to have via its interest-rate policy” as I’m sure this sound pretty disturbing to many German readers who trust the great Professor.

You and CB above have made various points about the unusual nature of current ECB operations. But they do not at all add up to ECB interest rate policy becoming irrelevant for private rates or “losing control over the German economy.”

As for “if all central bank money goes to banks in the periphery and is transferred to banks in the core in the process of paying for peripheral imports” I have not spent time discussing the question of linkages between central bank operations and current account deficits, though I agree with what Buiter has written on this. Still, it’s worth point out that, in Ireland, the transfer of money from banks in the periphery to banks in Germany has not been related to the financing of a current account deficit.

… except that no core European bank lends to a peripheral European bank (beware of at EONIA) — this is why the peripheral banks turn to the ECB in the first place.

Thus, if all central bank money goes to banks in the periphery and is transferred to banks in the core in the process of paying for peripheral imports, the relevant short-term term interest rate for the core baks is the rate at which they can deposit surplus liquidity at the ECB — which is lower than the ECB refinancing rate. Put differently: the segregated nature of the Euro Area financial system and the distorted central bank operations it triggers will ultimately force rates in the European core to the lower bound of the ECB’s interest rate corridor. Certainly an unintended and unwelcome outcome, and the opposite of what the booming German economy needs.

Btw, I am not trying to “defend” Sinn in any way (as my posts on the matter should make clear, see the links below). I have no dog in this fight. I believe, however, that this debate is important, while distorted by high personal stakes of many participants that result in exaggerated claims (on both sides).

One way of seeing the issue is that in times of crisis the Eurosystem functions like unlimited IMF-type liquidity support for countries in the European periphery. I.e., peripheral banks have unlimited access to hard currency to fund domestic absorption. This is very different from current account crises in the past: neither did Thailand in 1997 or Argentina in 2001 have access to unlimited US Dollar liquidity, nor could Latvia or Hungary in 2008 tap unlimited euro liquidity. These countries had to operate within the constraints of tight multiltateral rescue packages, and had to make up for the parts of domestic absorption that these packages could not fund by adjusting spending.

A relevant and in my view perfectly legitimate question - which should be at the center of this debate - is whether unlimited access of peripheral financial systems and economies to hard currency through the Eurosystem prevents necessary adjustment. This needs to be analyzed on a case-by-case basis. In my personal view it is hard to make such an argument for Ireland, given that its current account has swung into surplus and Ireland’s exports and GDP are growing. I.e., the Irish economy is adjusting while and in spite of enjoying unlimited access to hard currency. Greece and Portugal may be a different matter though. Going by Sinn’s last article (the sections you don’t quote), he seems to see this similalrly.

P.S.: the links (first post comes with an English version):

http://kantooseconomics.com/2011/06/16/wo-hans-werner-sinn-recht-hat-und-wo-nicht/

http://kantooseconomics.com/2011/06/23/die-usa-sind-in-der-tat-anders-%e2%80%93-ganz-anders-nachtrag-zur-sinntarget2-debatte/

“points to a severely distorted and segregated financial system that triggers severely distorted central bank operations as a result. To the extent that Sinn points to this he makes a perfectly fair point.”

I never like this style of argument, i.e. defending somebody by pointing to something they didn’t say. Nobody could deny that current central bank operations are very unusual and reflect serious core-periphery financial strains.

But that’s not the point I was addressing. I was addressing Sinn’s claim that “If German banks drop out of the refinancing business, the European Central Bank will lose the direct control over the German economy that it used to have via its interest-rate policy.” That claim goes way beyond saying central bank operations are distorted. And, again in what appears now to be a deliberate pattern, it appears to be designed to sound scary to a German audience (”the ECB has lost control over our economy ….”).

As for your claim that “the relevant rate for Germany would be the ECB deposit rate”, I don’t think you’ve understood my argument. The ECB has a “corridor style” system, so it’s main refinancing rate, deposit rate and marginal lending all play a role. However, the rate the ECB’s targets (EONIA — overnight interest average) has tended to track the main refinancing rate pretty closely.

A bank that has surplus funds will get a better return lending it to other banks at something like the EONIA rate than it will get on deposit at ECB. So the main refinancing rate is still the key rate determining market conditions.

I am wondering, whether HWS should reconsider his Delphi Conference, which is proposed for September 23rd and 24th on Hydra Island in Greece, discussing the following topics:

Reforming the Stability and Growth Pact
• Financial stability of the EMU
• The role of ECB
• Fiscal imbalances and sovereign default in the EU
• Debt consolidation strategies
• Dealing with Current Account Imbalances
• The role of EURO in the emerging world monetary system

It would seem to me that the chosen location could be a little tricky, then again, besides HWS they have George Economides as a scientific organizer.

“Sinn is also right, btw, that the ECB refinancing rate would cease to determine German short-term interest rates - the relevant rate for Germany would then be the ECB deposit rate”

…which the ECB would still have control over, whether by changing the refinancing rate (and so the deposit rate), or by changin gthe rate corridor between refinancing and deposit rate.

Btw, for all this suggestion that “core banks do not refinance at the ECB”, i assume no one is familiar with Depfa Bank and their landesbank bretheren…

Sinn is also right, btw, that the ECB refinancing rate would cease to determine German short-term interest rates - the relevant rate for Germany would then be the ECB deposit rate.

HK

If German banks drop out of the refinancing business, the European Central Bank will lose the direct control over the German economy that it used to have via its interest-rate policy.

I thought the ECB was not supposed to have control over any economy in normal circumstances and indeed in abnormal circumstances. It is supposed to control in respect of the whole EZ economy, not in respect of a favoured member.

What happens Target2 wise when UK/US institutions invest(ed) in Irish senior bank debt ? Also how does such investment affect overall money supply ?