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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
• World GDP
+
64 %
• Trade
+
199 %
• Financial
transactions
+ 1,007 %
H.-W. Sinn
Summary of the
argument
H.-W. Sinn
• Financial industry invented opaque
financial products
• Competition of laxity implied
excessive deregulation
• Gambling with limited liability
• Huge net capital flows and current
account imbalances
• Overheating, bubbles, recession
• Policy recommendation:
more equity, more liability
H.-W. Sinn
H.-W. Sinn,
The New Systems
Competition
Yrjö Jahnsson Lectures,
Basil Blackwell: Oxford 2003
Oxford University Press
H.-W. Sinn
US capital imports
H.-W. Sinn
800
Current account surplus/net capital export
1929-2012
bn US$
$ 670
bn.
600
400
Emerging and
developing economies
1980-2008
200
0
-200
USA
-400
-600
-800
$ -778
bn
1930
1940
1950
1960
1970
Source: IMF; Bureau of Economic Analysis; Ifo Institute calculations.
1980
1990
2000
2010
H.-W. Sinn
Breakdown of net capital exports
and imports: shares in 2007
Net capital exports
Venezuela
Rest
Qatar
Libya
Hong Kong
Iran
Malaysia
China
Algeria
21%
Taiwan
Sweden
Germany
UAE
14%
Singapore
Kuwait
Japan
Netherlands
12%
Norway
Switzerland
Russia
Saudi
Arabia
Net capital imports
Ireland
India
Poland
South Africa
Portugal
Romania
France
Turkey
New Zealand
Bulgaria
Rest
USA
49%
Greece
Italy
Australia
United Kingdom
7%
Spain
10%
H.-W. Sinn
Treasury bills to China
H.-W. Sinn
Hot potatoes to Europe
• Mortgage-backed securities (MBS)
• Collateralized debt obligations (CDO)
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
30
%
Savings rate of private US households
(1929-2012)
25
20
15
After data revision
of June 2009
10
5
0
-5
H.-W. Sinn
The bursting bubble
H.-W. Sinn
New home sales in the US
1500
Thousands, seasonally adjusted
1350
1200
1050
900
-76%
750
600
450
Nov. 13
January 2009
300
150
Aug. 11
63 65
70
75
80
Source: U.S. Department of Commerce: Census Bureau.
85
90
95
00
05
10 13
December 2013
H.-W. Sinn
US house prices – Case-Shiller Index
240
January 2000 = 100
200
-34%
September
2013
160
April 2009
120
80
40
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
Source: Standard & Poor Case-Shiller, composite index.
December 2013
H.-W. Sinn
The
regulatory causes
H.-W. Sinn
Regulatory deficiencies
• 2004 S.E.C. decisions
• Off-balance sheet business
• Mark-to-market principle
• Basel: low risk weights
• Competition of laxity
H.-W. Sinn
Limited liability, opaqueness
and expected bail-outs create
casino-like attitudes
• Undercapitalization
• Excessive risk-taking
H.-W. Sinn
Equity-asset ratios and returns on
equity in 2006
Equity/asset
ratio (%)
Return on
equity
before tax
Standard &
Poors
long
Moody‘s
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
Current account surplus/ net capital export
200
Billion euros
Germany
100
0
The euro
tango!
-100
GIPSIC
-200
-300
95
96
97
98
99
Source:
2013.
Source: Eurostat,
Eurostat,April
Datastream.
00
01
02
03
04
05
06
07
08
09
10
11
12
H.-W. Sinn
Property prices in the GIPSIC countries
240
Q1 2000 = 100
-34%
220
200
180
Case-Shiller
house price
index
-21%
160
140
120
GIPSIC
house prices
100
80
60
40
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
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
• Contingent Convertible Bonds (CoCos)
• All activities in balance sheet
• Basel III with better (or no) risk weights
• Rating agencies to be paid by the buyers
• Anticyclical leverage ratio
• Lowest-value principle (Colbert)
• Bankruptcy procedures for banks and states
• International regulatory harmonization
H.-W. Sinn
H.-W. Sinn