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