Letters and Readers’ Letters on Reporting of the Financial Crisis in November and December 2008

In 2008 German Federal President Horst Köhler, Friedrich Merz, Arnulf Baring and Hans-Werner Sinn were accused by the German weekly Die Zeit of being: “Propagandists of a rule-less market economy and enemies of the State” who were jointly responsible for the deregulation of banks that led to the financial crisis. Sinn reacted to this accusation with a reader’s letter contesting the accusation with regard to himself, pointing out that he has always argued for stronger, not weaker regulation of banks; and asserting that the article was based on misinformation.

In reality, Sinn argued way back in 2003 in his Yrjö Jahnsson Lectures, published under the title: “The New Systems Competition” by Basil Blackwell, that competition between states or regulatory authorities had degenerated into a contest of cowardice, and that hard, harmonised minimum criteria were need to counteract this trend. According to Sinn, lax regulation encourages banks to engage in excessively risky business activities due to the asymmetrical profits and losses at stake. Banks privatise their profits and let the public pay for their losses. The fact that such asymmetry encourages excessive risk-taking was the subject of Hans-Werner Sinn’s thesis submitted in 1977 and published in 1980 as a book by J.C.B. Mohr (Paul Siebeck) (see in particular Kapitel 3: Die Struktur der Risikopräferenz (PDF, 13978 KB) and Kapitel 5: Anwendungsgebiete (PDF, 15217 KB); Translation: Economic Decisions under Uncertainty, North Holland: Amsterdam, New York und Oxford 1983, 359 pages; Chapter 3: The Structure of Risk Preference and Chapter 5: Areas of Application).

Sinn also made statements along these lines in a controversial debate with liberal economists in the specialist journal FinanzArchiv, who argue (unlike Sinn) that competition between regulation systems gives rise to an efficient banking regulation system.

Debate in FinanzArchiv:

Hans-Werner Sinn, “Risk Taking, Limited Liability and the Competition of Bank Regulators”, FinanzArchiv 59, 2003, pp. 305–329; CESifo Working Paper No. 603, 2001; NBER Working Paper No. 8669, 2001.

Ernst Baltensperger, “Competition of Bank Regulators: A More Optimistic View. A Comment on the Paper by Hans-Werner Sinn”, FinanzArchiv 59, 2003, pp. 330–335.

Peter Spencer, “Can National Banking Systems Compete?, A Comment on the Paper by Hans-Werner Sinn”, FinanzArchiv 59, 2003, pp. 336–339.

Hans-Werner Sinn, “Asymmetric Information, Bank Failures, and the Rationale for Harmonizing Banking Regulation. A Rejoinder on Comments of Ernst Baltensperger und Peter Spencer”, FinanzArchiv 59, 2003, pp. 340–346.

A summary of Sinn’s contributions can be found in: Hans-Werner Sinn, Risk Taking, Limited Liability, and the Banking Crisis, Selected Reprints, Ifo Institute, Munich 2009.

Further letters and readers’ letters related to the financial crisis:

Reader’s letter from Annette Marquardt to the FAZ dated 14.11.2008 on the statement by Gerd Manke dated 11.11.2008; published under the title: “Banking regulation”, Frankfurter Allgemeine Zeitung, 22.11.2008, No. 274, p. 8.

Letter from Hans-Werner Sinn to Helmut Markwort, Focus, dated 25.11.2008 on reports in the Focus in November 2008 on Hans-Werner Sinn’s statements on the financial crisis.

Letter from Hans-Werner Sinn to Dominik Wichmann, SZ-Magazin, dated 08.12.2008 on reports in SZ-Magazin in December 2008letter from Diana Brand dated 07.12.2008 to the SZ-Magazin on reports in December 2008.