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H.-W. Sinn
H.-W. Sinn
How to Shut Down the Global Casino The case for more liability
Hans-Werner Sinn AEA Meetings Philadelphia January 2014
H.-W. Sinn
Economic globalization 1990 - 2007
• Trade + 199 %
• Financial transactions + 1,007 %
• World GDP + 64 %
H.-W. Sinn
Summary of the
argument
H.-W. Sinn
• Policy recommendation: more equity, more liability
• Financial industry invented opaque financial products • Competition of laxity implied excessive deregulation
• Overheating, bubbles, recession
• Gambling with limited liability
• Huge net capital flows and current account imbalances
H.-W. Sinn
Oxford University Press
H.-W. Sinn, The New Systems Competition Yrjö Jahnsson Lectures, Basil Blackwell: Oxford 2003
H.-W. Sinn
US capital imports
H.-W. Sinn
-800
-600
-400
-200
0
200
400
600
800
1930 1940 1950 1960 1970 1980 1990 2000 2010
bn US$
Current account surplus/net capital export 1929-2012
Source: IMF; Bureau of Economic Analysis; Ifo Institute calculations.
Emerging and developing economies
1980-2008
$ -778 bn
$ 670 bn.
USA
H.-W. Sinn
Breakdown of net capital exports and imports: shares in 2007
Net capital exports Net capital imports
Japan 12%
Germany 14%
China 21%
USA 49%
Spain 10%
United Kingdom 7%
Rest Venezuela
Qatar Libya
Hong Kong Iran
Malaysia
Taiwan Sweden
UAE Singapore
Kuwait Netherlands
Norway Switzerland
Russia Saudi Arabia
Algeria
Rest
Ireland New Zealand Bulgaria India
Poland South Africa
Portugal
France Turkey Greece
Italy Australia
Romania
H.-W. Sinn
Treasury bills to China
H.-W. Sinn
• Mortgage-backed securities (MBS)
• Collateralized debt obligations (CDO)
Hot potatoes to Europe
H.-W. Sinn
Savings glut?
Ben Bernanke, Bundesbank speech (2007)
H.-W. Sinn
Savings glut?
Ben Bernanke, Bundesbank speech (2007)
“These external imbalances are to a
significant extent a market phenomenon and, in the case of the US deficit, reflect the
attractiveness of both the US economy and the depth, liquidity, and legal safeguards
associated with its capital markets.”
H.-W. Sinn
-5
0
5
10
15
20
25
30 %
Savings rate of private US households (1929-2012)
After data revision of June 2009
H.-W. Sinn
The bursting bubble
H.-W. Sinn
150
300
450
600
750
900
1050
1200
1350
1500
63 65 70 75 80 85 90 95 00 05 10 13
-76%
Source: U.S. Department of Commerce: Census Bureau.
January 2009 Aug. 11
December 2013
New home sales in the US Thousands, seasonally adjusted
Nov. 13
H.-W. Sinn
40
80
120
160
200
240
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 08 07 09 10 11 12
January 2000 = 100
Source: Standard & Poor Case-Shiller, composite index. December 2013
-34%
April 2009
September 2013
13
US house prices – Case-Shiller Index
H.-W. Sinn
The
regulatory causes
H.-W. Sinn
• Competition of laxity
• 2004 S.E.C. decisions
• Off-balance sheet business
• Basel: low risk weights
• Mark-to-market principle
Regulatory deficiencies
H.-W. Sinn
• Excessive risk-taking
• Undercapitalization
Limited liability, opaqueness and expected bail-outs create casino-like attitudes
H.-W. Sinn
Equity-asset ratios and returns on equity in 2006
Equity/asset Return on Standard & Moody‘s ratio (%) equity Poors long before tax long
Bear Stearns 3.5 25.9 A A2
Goldman Sachs 4.3 40.7 AA- Aa3
Lehman Brothers 3.8 30.8 A+ A1
Merrill Lynch 4.6 25.1 A+ A1
H.-W. Sinn
Main Street gambled as
mortgage loans are
non-recourse
FOR SALE
H.-W. Sinn
The fight against red lining:
Community Reinvestment Act
1977/1994
H.-W. Sinn
Euro-internal
imbalances
H.-W. Sinn
-300
-200
-100
0
100
200
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Source: Eurostat, Datastream.
Current account surplus/ net capital export Billion euros
Germany
GIPSIC
12
Source: Eurostat, April 2013.
The euro tango!
H.-W. Sinn
40
60
80
100
120
140
160
180
200
220
240
87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Q1 2000 = 100
Property prices in the GIPSIC countries
Case-Shiller house price index
-34%
-21%
GIPSIC house prices
H.-W. Sinn
Implicit bail-out guarantees
and
explicit risk sharing by national central banks
implied excessive expansion of banking credit
in southern Europe and Ireland, sucking in
resources from abroad
H.-W. Sinn
Policy recommendations • Much more equity
• All activities in balance sheet
• Rating agencies to be paid by the buyers
• Anticyclical leverage ratio
• International regulatory harmonization
• Basel III with better (or no) risk weights
• Lowest-value principle (Colbert)
• Bankruptcy procedures for banks and states
• Contingent Convertible Bonds (CoCos)
H.-W. Sinn
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