The United States money market fund sector is very large, valued at some $2.6 trillion at the present time. It is very liquid, and, unlike the commercial banks, it is not protected by deposit insurance. A number of Jeremiad financial analysts consequentially worry about potential runs against these funds and press for additional regulations.
Such reformists lack a basic understanding of market principles. Money market funds are supposed to invest in safe assets, such as highly-rated, short term bonds. They provide minimal returns but high levels of liquidity for those who invest in such assets.
The threat of a run is the true safeguard against misbehavior on the part of such funds. If a fund invests in high risk securities – let us say euro-bonds or municipal bonds at the present time – forward-looking investors will pull their assets out immediately and substantially. Knowing that, only money market funds that court financial trouble will break their commitment to highly liquid and safe investments.
No individual or organization investing in a money market fund can legitimately assume that the fund will never ‘break the buck’. If they desire such an outcome then they will place their assets in commerical banks keeping within the deposit insurance limit.
So money market funds should never be viewed as too big to fail. Those who play in casinos – even for low stakes – know precisely what they are doing and the risks that they incur.
To protect the money market funds by deposit insurance assuredly will benefit the commerical banks, as would locking investors into their money market funds during a developing run.
The commercial banking system gambled excessively because of deposit insurance. Let us not follow suit with the money market funds. Let the stupidity stop with one major error.
Tags: breaking the buck, money market funds, the run is the safeguard not the problem
January 5, 2013 at 9:04 pm |
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