Target2 – The Zombie Returns

I have wasted way too much time with the Target2 debate and thought that everything as been said at least three times. However, not by everyone.

Yesterday,  Aaron Tornell with UCLA and  Frank Westermann (University of Osnabrück) exumed the debate with a weird post on Both academics got completely lost in the arcane details of central bank accounting and make claims that are not backed by facts. Unfortunately, this piece got a lot of publicity because FT Alphaville and  Felix Salmon picked it up.

Karl Whelan debunks the  arguments by Tornell and Westermann convincingly in a piece entitled “Worse than Sinn”. His conclusion is straightforward:

“this piece has even less to add (and more to subtract, if believed) to the stock of useful knowledge than Sinn’s various pieces”

There’s nothing to add to Karl’s points.

I really wounder how some academics work. If Tornell and Westermann would have bothered to take a look either a brief chapter in March edition of the Bundesbank monthly bulletin (pp 34ff) or the October edition of the ECB monthly report (pp 35ff) , they should have realised how flawed their description of the Target2 operations is.


Filed under Target 2

4 Responses to Target2 – The Zombie Returns

  1. Geoffrey Smith

    Keep fighting the good fight Olaf!

  2. I agree that Tornell and Westermann’s article is poor. Probably in an attempt to get noticed, they speculate about the Bundesbank selling gold, and assert that the Bundesbank might face public aversion to debt sales even though they note that it has already taken deposits. They seem to believe that the Bundesbank is normally a substantial buyer of bunds for monetary policy purposes, and they make a dubious link between Bundesbank lending and the ability of peripheral governments to fund themselves via their central banks. But I still think that Sinn has a point. In gross terms, the Bundesbank is lending to Greece, because, for example, it recycles the capital inflow from a Greek depositor back to Greece via the eurosystem. If the eurosystem broke up in a disorderly way such that Germany’s TARGET2 claim simply disappeared, Germany would lose a lot of money.

  3. ASR

    The zombie is back and it seems like Weidmann is also concerned.

    So what’s the deal? Are Sinn and Weidmann barking up the wrong tree or is Target2 a potential risk for Germany?