The misleading claims of Hans-Werner Sinn

de:Hans-Werner Sinn

How do you dare to take issue with Herr Profesor Sinn, you stupid blogger? (Image via Wikipedia)

Preliminary remark

After I wrote the following blog post, Hans-Werner Sinn reacted swiftly and withdrawed his misleading statement regarding me allegedly mistranslating him into English and published a new version of his paper clarifying that he did not intend to suggest I had mistranslated him. I’m glad that this issue has been cleared. With the  benefit of hindsight and given his quick actions, my initial headline (“The dirty tricks of Hans-Werner Sinn”) might have been a little bit too harsh. Hence, I changed it accordingly.

—- (end of remark)

I have been knowing Hans-Werner Sinn for almost ten years and this is not the first time I’m not agreeing with him.

Arguing with Sinn always is an intense and tough experience. However, I always experienced him as being fair and intellectually honest.

Up to this point.

Since early June several academics and economic journalists have been criticising Hans-Werner Sinn and his claims about Target2 transactions, me being one of them.

Now Hans-Werner Sinn defends himself with an egregious and disingenuous argument that is factually wrong.


In the first version of a new paper published on Friday night, Mr. Sinn refers to my blog post “The stealth bailout that doesn’t exist” (published on 6 June) and suggests that I mistranslated one of his key sentences into English.

In fact, however, I only used quotes from his English article “The Stealth Bailout”, which has been published on Voxeu.org on June 1st. (Here’s a PDF version of Sinn’s article I quote from.)

I’m really flabbergasted.

This is not the first time the Ifo institute is trying to defend Mr. Sinn with flawed and distorted arguments. But this is by far the cheekiest attempt.

I hope that Sinn is not personally responsible for this erroneous claim. Maybe it was an overstrained or sloppy subordinate. The one who has written that sentence either suffers from a severe perceptional disorder or just has not read either my text and/or Mr. Sinn’s English article on Vox.

The only other explanation left is that the author is deliberately saying something that is not true.

And now for the details.

In a new paper co-authored with Timo Wollmershäuser (“Target Loans, Current Account Balances and Capital Flows: The ECB’s Rescue Facility”), Sinn deals with several arguments put forward by his other critics. Among other things, Sinn refers to the reasons why Target2 operations allegedly crowd out credit growth in Germany.

This is a point he has been making again and again and that almost everyone else regards as plainly wrong. His critics claimed that Sinn’s made wrong statements about the way the ECB conducts monetary policy because his argument implicitly implies that the ECB sets a ceiling with regard to the quantitiy of money circulating in the economy.

This is the relevant paragraph in Sinn’s initial piece on Vox:

“[T]he new money coming into the German economy as a result of the payment for the tractor is likely to crowd out normal German money creation by way of the Bundesbank’s lending to German banks. The crowding out will not necessarily occur, but it is the normal case to be expected as, given Germany’s GDP and given Germany’s payment habits, the commercial banks only need a certain amount of euros for circulation in Germany. Moreover, strict crowding out is inevitable if the ECB controls the overall stock of central bank money in the Eurozone by way of sterilising interventions or auctioning off limited tenders. (…)

The stock of euros has changed neither in Ireland nor in Germany, and yet the tractor is delivered to the Irish farmer through a loan from the Bundesbank at the expense of loans to the German economy. This is a forced capital export from Germany to Ireland.” (all highlights made by myself)

In the initial version of their new piece (current version is here) , Sinn and Wollmershäuser assert (p: 18):

“The shift of central bank credit from Germany to the GIPS has been wildly misunderstood in the public discussion triggered by our various publications. In particular, it has been alleged that this statement was based on the implicit assumption that the ECB, instead of pursuing a full-allotment policy, limits the money supply, which of course it does not do. Such an implicit assumption was never made. It is not the money supply that is limited, but the demand for money.”

On page 45 they wrote:

“The sentence causing a misunderstanding in the German blogs, which were then translated into English by an overly active blogger [a footnote refers to my post], may have been this one from Sinn’s basic article in Frankfurter Allgemeine Zeitung:

“Da nach der Überweisung (durch das Target-System) zu viel Zentralbankgeld in Deutschland in Umlauf ist, kann die Bundesbank nur entsprechend weniger an die deutschen Banken verleihen.“

(Since too much central bank money is circulating in Germany after the swift transfer (through the Target system), the Bundesbank can only lend correspondingly less to German banks.)

This was never meant to say that the money supply was fixed. In his first VOX piece, to which Buiter and Whelan refer [comment: as I do], Sinn made it clear that he meant demand rather than supply (even though he then also said that his statement would also hold if supply were fixed):

“The crowding out will not necessarily occur, but it is the normal case to be expected as, given Germany’s GDP and given Germany’s payment habits, the commercial banks only need a certain amount of euros for circulation in Germany.”

I even quoted exactly this sentence and and made clear that I did not understand what Sinn means. I don’t know who wrote that allegedly mistranslated English sentence the article refers to. (“Since too much central bank money is circulating in Germany after the swift transfer (through the Target system), the Bundesbank can only lend correspondingly less to German banks.)”

One thing is for sure, however: It wasn’t me.

Each and every English Sinn quote I use comes straight from the same article on Vox Sinn is referring to in his latest paper.

Make up your own mind. This is the relevant section from my post published on 6 June:

Until this point [this refers to Sinn's version of the Irish farmer buying a German tractor and the Target2 operations related to this purchase], his way of reasoning is completely in line with the description by the Bundesbank. However, Sinn introduces a mind boggling twist. He writes:

“[T]he new money coming into the German economy as a result of the payment for the tractor is likely to crowd out normal German money creation by way of the Bundesbank’s lending to German banks.”

This is a really weird point and completely at odds with everything I’ve learned about money creation. (…)

Here, Sinn’s way of reasoning becomes quite fuzzy:

„The crowding out will not necessarily occur, but it is the normal case to be expected as, given Germany’s GDP and given Germany’s payment habits, the commercial banks only need a certain amount of Euros for circulation in Germany.”

Que?

The next sentence is even weirder:

“Moreover, strict crowding out is inevitable if the ECB controls the overall stock of central bank money in the Eurozone by way of sterilising interventions or auctioning off limited tenders.”

This statement comes close to saying:

“Today is a sunny day. But if it were raining, it would not be nearly as beautiful outside.”

The ECB does not control the overall stock of central bank money in the Eurozone.  The Bundesbank tried this in the 70ies and fortunately abandoned this strategy a long time ago. (…)

Sinn carries on regardless:

“ultimately, the credit to the Irish farmer comes from the Bundesbank at the expense of a similar credit provided to the German economy.”

Mr. Sinn, I neither mistranslated any of your sentences not did my English blog post shape the public view of your argument.

With regard to Sinn’s wrong or misleading description about monetary policy in the Euro area, several other people much smarter than me came to the same conclusion than I did.

One example is Martin Wolf, the famous “Finanicial Times” columnist. This is how Martin summarised Sinn’s argument in the FT on 1 June (five days before my English blog post was published):

“By shifting so much of the eurozone’s money creation towards indirect finance of deficit countries, the system has had to withdraw credit from commercial banks in creditor countries.”

This is clearly an argument based on the supply for central bank money, not on the demand for it.

Ironically, after the public debate got started, the “CESifo Press service” described Wolf’s article as “excellent”.

Among other things, Wolf’s article triggered a letter by Lucrezia Reichlin, an Economics professor at the London Businss School and former Director General for Research at the European Central Bank. In the letter published on 9 June she asserts:

“it is not clear what Prof Sinn and Mr Wolf mean when they say that “by shifting so much of the eurozone’s money creation towards indirect finance of deficit countries, the system has had to withdraw credit from commercial banks in creditor countries”. In the euro system, under the fixed rate full allotment system of operations, liquidity is supplied at satiation at a fixed interest rate and there is thus no withdrawal of money creation from creditor countries.”

Karl Whelan, an Economics Professor at the University College of Dublin, made a similar point based on the arguments put forward by Sinn’s article on Voxeu:

“Professor Sinn also argues that the ECB’s lending to peripheral economies (GIPS in his terminology) is “crowding out” credit in Germany. He says that “If every year a further €100 billion is granted to the GIPS as Target loans, the stock of credit given by non-GIPS central banks to their commercial banks via refinancing operations will shrink by the same amount”.  This is because “strict crowding out is inevitable if the ECB controls the overall stock of central bank money in the Eurozone by way of sterilising interventions or auctioning off limited tenders.”  Indeed, the Professor worries that ECB policy “shifts too much economic vigour to the GIPS.”

These are highly misleading claims.  The ECB are not currently auctioning off credit via limited tenders. Instead, they are providing the full amount of liquidity requested by banks provided they have sufficient eligible collateral. So, no German bank is being denied funds from the ECB because of the lending operations to Ireland or other countries.”

I absolutely acknowledge that it is possible that Sinn’s way of reasoning was just unclear and we all got him wrong all the time . (I asked him to clarify in two emails written to his press spokesman Jürgen Gaulke  on 3 June and 7 June explicitly asking for a clarification regarding Sinn’s statements about money creation and crowding out. Unfortunately I did not hear anything from Ifo for several days. The first reaction from Sinn came on the evening of 9 June, after I told the press office that I was going to publish an article on that matter in the printed edition of Handelsblatt).

What I don’t understand is why he cannot just concede that his writing was quite confusing.

This is what Karl Whelan writes about Sinn’s latest paper:

“Well, who knows what Sinn did or did not understand about ECB operations when he penned his various pieces and really who cares? From my perspective, the key question is whether readers of Sinn’s articles (in particular, German readers) will have come away with the impression that ECB loans to Ireland were contracting credit in Germany. (…)

Indeed, Sinn’s response has something of a Scooby-Doo feeling about it (“if it wasn’t for those meddling bloggers”!)”

Two weeks ago, Jürgen Stark, the ECB’s chief economist said with regards to Sinn and his claims on Target2:

 “some people are at risk of losing their good reputation”

I usually don’t agree with Jürgen Stark. But I’m afraid Stark really has a point here.

Professor Sinn, are you really in such a desperate situation that you have to  rely on such  misleading claims?

Update, 26 June: After I complained to Hans-Werner Sinn about this issue, he sent me the following reply this moring

(This time, the transplation IS acutally done by myself):

“Dear Mr. Storbeck,

You’re right. Our wording was unclear and we regret this. We did not want to say you mistranslated an isolated sentence, but this  is in deed one way of understanding this  statement. (As you might be aware, we are still puzzled over the question which sentence caused the debate going astray. You might take this as an indication that we did not want to say that you’ve mistranslated a sentence.)

We’re going to change this immediately on our website and in the mailings, which have  fortunately not been completed yet. We also clarifiy that we did not want to make this statement.

Yours sincereley

Hans-Werner Sinn

The footnote on page 45 of the new version of the paper now says:

“An earlier version of  this paper had a formulation that could have been misunderstood as saying that a blogger had verbally mistranslated a sentence. That was not meant.”

You can see the first version of the paper here.

 

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24 Comments

Filed under Target 2

24 Responses to The misleading claims of Hans-Werner Sinn

  1. Pingback: Professor Sinn and the Interdistrict Settlement Account [Wonkish] | Alea

  2. LorcanRK

    I can’t understand Sinn’s unwillingness to admit any mistake on his part.

    Blaming mistranslations and misinterpretations is not helping his cause, and is only going compound the damage already done to his reputation and the reputation of his institution.

  3. I’ve just spent some time thinking about why there is such a thing as the paragraph with the “overly active blogger”. I think I’ve got it: On the 3rd of June you wrote about Target2 in the Handelsblog – in German and citing the sentence from Sinn’s (German) article in the FAZ. And on the 6th of June you wrote about Target2 here – in English of course. Sinn (or his press officer) may have assumed that your second piece was just a translation of the first one; what means that he did not read it, at least not completely. Otherwise he obviously would have noticed that you cited Sinn’s (English) article on voxeu. Should we call that an overly sketchy professor?

  4. Pingback: Handelsblatt.com - Hans-Werner Sinn, ein “übermäßig aktiver Blogger” und schmutzige Tricks « Handelsblog

  5. JKH

    “I absolutely acknowledge that it is possible that Sinn’s way of reasoning was just unclear and we all got him wrong all the time.”

    I think that’s almost possible. That’s based on my reading of Sinn’s various elaborations of what he was trying to say. Here is my attempt at what he should have been trying to say:

    In a given circumstance, the ECB does refinancing operations to supply the banking system with central bank money sufficient to maintain orderly markets and allow liquid trading around the level of the policy interest rate. Somewhere in that process, there are conceptual supply and demand functions for central bank money, and the ECB supplies its money according to the desired intersection around the policy interest rate. If funds are trading at that rate, and if markets are orderly, there is simply no need for the ECB to supply more than that. There is always a limit on what needs to be done in the short term.

    The inflows of reserves from the periphery into the German banking system for example, as described by Sinn, can be viewed as a source of central bank money that is exogenous to the regular Bundesbank refinancing operations. If the circumstance otherwise assumed above remains unchanged, then there is no reason for the Bundesbank not to take offsetting action by absorbing the same amount of reserves – which it does by withdrawing from refinancing operations for an equivalent amount.

    From a Bundesbank balance sheet perspective, again assuming the same circumstance as above, it is natural to expect an increase in TARGET net asset claims, offset by a similar reduction in the stock of Bundesbank refinancing credit. That empirical expectation could be described as the crowding out of refinancing credit, directly attributable to the crowding in of surplus TARGET balances. The crowding out occurs because the Bundesbank, roughly speaking, has no reason to change the size of its balance sheet in the circumstance – and the balance sheet will lengthen if it takes no offsetting action.

    Crowding out in that context means the crowding out of the regular supply mechanism for central bank money through refinancing. This crowding out, or reduction, is a natural, market sensitive supply response to an unchanged demand for central bank money, but in the face of a second, new, unavoidable, steady source of central bank money. If desirable market conditions as an objective are consistent with the result, there is no reason not to withdraw that refinancing from the German banking system. It’s a crowding out of supply, but demand driven and market sensitive.

    That doesn’t mean that the Bundesbank is at all constrained if circumstances change from there, and additional refinancing with further monetary base expansion is warranted due to other developments.

  6. Georg R. Bauumann

    Greetings,

    two points that I find most irritating, one is that established and respected scholars, can even have fundamental differences on such basic monetary mechanics. To me it indicates, how shall I put it, there is room for improvement, and secondly, CESifo is the heavy weight in economic research in Germany, and not exactly a unknown player in the EU concerning influence on policy makers, as such they hold a special responsibility in my opinion. After careful consideration, I find it irresponsible what they are doing here, it certainly pours oil into a fire of national sentiments that already is somewhat out of control. This is not helpful.

    Best wishes
    Georg

  7. David O'Donnell

    Isn’t it lovely to be able, eventually, to agree with Jürgen Stark on something? :lol:

    Keep up the good work.

  8. Julio C. Saavedra

    I have been following the Target debate from the very beginning. By now it is abundantly clear that the issue is not simple. Some very clever minds did get confused, acknowledged difficulties in understanding both the mechanics and the implications of the currently bloated Target balances, posited their own interpretations of what Hans-Werner Sinn was trying to say, and from that vantage point voiced their criticism. Mr Sinn himself has been fine-tuning his assertions in no small part thanks to the comments on the press, various blogs (including this one) and from journalists present at the press briefing on the topic held last June 22nd in Frankfurt. All very legitimate. What I find more regrettable is the way some of the discussion has taken on a distinctively personal tinge.

    Hans-Werner Sinn swiftly reacted to your legitimate complaint described in the article above. He immediately acknowledged that the statement in question was misleading, stating that there was no intent behind it, and immediately corrected the paper and added a clarifying footnote (my translation):

    “Dear Mr. Storbeck,
    You are right. Our wording was misleading, and we regret it. While it was not our intention to say that you mistranslated a single sentence, it is true that the text passage can be construed that way. (You may infer that it was not our intention to allege that from the fact that we acknowledge being puzzled regarding which sentence made the debate go astray.) We will amend this immediately on the website and in the mailings, which fortunately have not yet been completed, and will make clear that we did not intend to make such a statement.”

    In a spirit of fairness, it would have been appropriate to change both the title of this blog article and the passages attacking Sinn in this regard, instead of leaving his response as some kind of an addendum to the main entry. As it is, anyone skimming the text or just reading the title would be left with a thoroughly different impression of Sinn’s intent all along.

    It would be far preferable to stick to the core arguments and criticise them on their merits. Commenter JKH above makes a very good go at it, and from what I can see, he is absolutely right. Can we not follow his example and try to shed light on the issue, instead of just trying to score points?

    Julio C. Saavedra
    Director, External Relations
    CESifo

    • @ Julio:

      Thank you very much for getting involved. I really appreciate the CESifo finally joins this debate here.

      In a way, I see your point. I appreciate Sinn’s swift reply and accept his apology. Hence, I adjusted the title of the post accordingly and added the preliminary remark. I hope this will make sure that the even a cursory reader will not get a wrong impression. However, I’m convinced that re-editing the post completely would be against the spirit of blogging. By now, several other blog link to this site, and the readers would get a wrong impression if I changed the relevant passages attacking Sinn.

      I accept that there was no intend behind the statement that I mistranslated Sinn into English while in fact I only used orginal quotes from his English articles. Frankly, however, I’m really surprised by this degree of sloppiness. I also don’t understand why the Ifo institute serveral times has publicly denied claims that I never made.

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  10. @Julio C. Saavedra: Is it really so hard to say “I’ve made a mistake”? Is it really necessary to talk of a “misleading wording” instead?

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  13. I like to think I know a bit about central banking, and for what it is worth, I reckon that Hans Werner Sinn is basically correct, as I explain here: http://reservedplace.blogspot.com/2011/07/right-on-target.html

    The key point, I believe, is that, by declining to tighten collateral requirements in line with the market for the type of bonds that the payment deficit country banks tend to have available to pledge against ECB refinancing, the ECB is effectively offering these banks subsidised loans. This inevitably disadvantages banks with more valuable collateral to offer, such as those in Germany.

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  16. Olaf,
    Regarding your comment on my blog post referred to above, I added yesterday a numerical example to demonstrate how TARGET2 payments and ECB monetary policy operations interact – they are almost (reserve requirements make a fractional difference) two sides of the same coin. I do get the impression that, as time goes by, more analytical articles are appearing which do support Sinn’s basic ideas, although not necessary the more polemic conclusions that he drew from them (eg Germany financed the PIGS current account deficits).

  17. No Kumbaya

    As of July 5, some “German blogger” is still off the reservation:
    http://www.nber.org/~wbuiter/originalsinn2.pdf

    • Thanks for that pointer. I already new the paper and Sinn’s letter to Buiter cited in it. After an initial blowup I decided to ignore this helpless defamation. May I suggest that Sinn and Frey set up a self-help group with regard to these bloody bloggers ;-)

  18. Pingback: “GIPS Euros” vs. “German Euros” – Debunking Hans-Werner Sinn, Vol. II | Economics Intelligence

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