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ALLIANCE FO§ DEMOCRACY
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The Sinn Problem - 5 Theories, 5 Errors?

In an article appearing in its edition of 16 January, the business daily Handelsblatt dedicates several pages to the distinguished German economist Hans-Werner Sinn. The article is titled “The Sinn Question – Five Theories, Five Errors.” The only question is, who is in error? Hans-Werner Sinn, or Handelsblatt ?
The first theory is of special interest to the Alliance for Democracy. It concerns the so-called Target 2 claims.
Here is an example: Stavros, a Greek citizen, wants to buy a new Mercedes from Franz of Germany. Stavros has no money. So, he seeks a loan from his local bank in Greece. The bank is instructed to send the money to Franz in Germany. The money has to make various intermediate stops along the way. It goes from Stavros’ bank to the Greek central bank, from there to the German Bundesbank, and finally to Franz’s local German bank. In the process, Stavros’ local bank has to provide collateral (e.g. Greek government bonds). The German central bank then pays the money to Franz’s local bank and Franz can then withdraw the money. This means: effectively it is the German central bank who pays. In return, it receives collateral. In addition, it has a claim against the Greek central bank. However, for simplification purposes, the European Monetary System stipulates that transactions within the Eurozone be settled at the end of the day. Therefore, instead of a claim against the foreign central bank there is a claim against the ECB corresponding to the total balance. These are the Target 2 claims of the German central bank against the ECB. The ECB acquires a corresponding total claim against central banks that have a negative balance.
According to Handelsblatt , this is the way German claims against Greek debtors are secured. Without the Target 2 cash injections from the ECB, the Greek banking system would be ineffective. Franz, from our example above, would therefore receive nothing. There is a bit of truth in the Handelsblatt opinion, but it is less than half the truth and therefore erroneous.
Firstly: If Target 2 did not exist, Franz would not take the risk of selling his car to Stavros. He would sell it to someone else who is financially solvent. This means: Target 2 results in more and more sales to insolvent parties. In criminal law that is called fraud and/or the failure to file for insolvency in due time.

Secondly: Franz does receive his money. Therefore, for Franz the sale to Stavros was successful. But does the German central bank receive its money from the ECB? And the ECB its money from Greece? Not likely. Significant risks are incurred by the German Bundesbank and the ECB. The central banks have to seek compensation for this default from the state, i.e. the taxpayers, through (still) higher taxes (or still more debt).

The accumulation of significant risks by the central banks is therefore no security. It is rather a deferral of the risks, which will most likely become a reality with disastrous consequences.
The economic advice of Hans-Werner Sinn is as simple as it is accurate: Such risks should not be accumulated but eliminated to avoid the big bang! The answer to the Sinn question is therefore clear: It is Handelsblatt that is in error.
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