April 6, 2009, 3:11 PM
Why Germany Prefers Regulation to Stimulus
Americans struggling to understand why Germans seem to care little about economic stimulus these days, and yet so much about regulation, could do worse than to read a recent essay by Hans-Werner Sinn, head of the Ifo Institute in Munich.

Mr. Sinn makes a brief appeal to John Maynard Keynes — somewhat oddly since that name is usually associated with stimulus — in arguing that governments need to step in and forcibly recapitalize hard-hit banks with equity. Sweetheart loans are a bad idea, says Mr. Sinn. Instead, only issuing new shares will do, and we should not cry for chief executives who have to water down their shares. That is the most pressing need, Mr. Sinn writes.

But take careful note of the name Walter Eucken, whom Mr. Sinn references with a reverential tone that could be found only in Germany. Mr. Eucken, who died in 1950, is closely associated with a school of economics known as ordoliberalism, which teaches that state regulations can help the free market produce results close to its theoretical potential.

After World War II, ordoliberals (also known, confusingly given the argot of today’s anti-globalization protesters, as neoliberals) defended capitalism but said the state needed to play a strong role in regulating what did not come naturally. That meant ensuring stable prices, protecting property rights and – oh, how prescient this sounds today! – ensuring unlimited liability for those daring capitalists so that they bear the rewards, but also the risks, of their behavior.

It is important to remember the historical context here. After the war, and the Depression that preceded it, capitalism looked discredited (and Communist armies occupied half of Europe). Ordoliberalism offered a credible argument that stemmed the socialist tide by essentially arguing for capitalism, but with a strong state. It helped cement a political coalition against widespread nationalization and central planning, two approaches very much in favor when Germany lay in ruins in 1945.

In his essay, Mr. Sinn writes that “a time bomb is ticking” because if banks shrink themselves back to health, they will drag down economies with them. “And all this just because banks, hedge funds, special purpose vehicles, investment funds and real-estate financers were allowed to conduct their business with only tiny amounts of equity capital,” he continues. “Without equity, there is no liability, and without liability, people gamble.”

This is a good jumping-off point to understand why Germans see regulation as part of the solution to today’s crisis — this was a major point at the recent G-20 summit — even as the United States tut-tuts that the Germans are not stimulating enough. The most successful economic order that Germany – and some would say Europe – has ever seen put stability first and last. It did not encourage financial wheeling and dealing for its own sake, but put it in the context of the entire economy. Mr. Eucken would have asked what financial innovation did for the real economy, and whether the innovators were taking risks the rest of us would pay for, Mr. Sinn suggests.

And by the way: In case you are inclined to dismiss Mr. Eucken as a guru of some irrelevant talking heads, think again. Jürgen Stark, an executive board member of the European Central Bank, has praised Mr. Eucken as a thinker whose main work, Principles of Economic Policy, “has been a constant source of inspiration throughout my career.”


It's correct.
you're asking us what we think of the status quo?
well i guess it SUCKS
its dumb
more like gordoliberalism

aerdil posted:

Actually it's only the status quo in Germany, the default elsewhere is neoliberalism, which does not come with a social market economy.

'Sinn' means 'mind' and 'Gift' means 'poison' in German
I looked the guy up and was mildly surprised to read that he was "associated" with the resistance movement during the war because honestly this seemed like it could have easily been the work of a rehabilitated nazi economist