June 15th, 2012
Econintersect: Actually the two economists use the word “scrap” in the title of their Bloomberg Op Ed this week. We have perhaps used dramatic “overkill”.
But the result of the proposal is the same: replace money market funds with a government-backed banking process that would do away with the potential for runs on money market funds, as occurred during the financial crisis of 2008, and the problem of “breaking the buck” which occasionally arises when a money market fund cannot maintain the $1 principal guarantee.
Follow up:Amar Bhide and Christopher Papagianis are proposing that an extension of the U.S. Treasury Direct program through which private investors buy Treasury securities without using an intermediary be extended to banks and brokerages to create a new, highly liquid and principal guaranteed source of assets for money funds. Runs on money market funds and breaking the buck would be things of the past.
The two argue that this would be a win-win since current money market fund providers are operating at a loss while holding risky assets such as what they call “dodgy European bank paper.”
In their article they discuss other alternatives that have been proposed for money market funds, such as allowing the principal value to float or requiring increased capital reserves for fund sponsors. They identify drawbacks to these other proposals.
Editor’s notes: This would be, on a much larger scale, a very distant cousin to the postal savings systems that have been used in many countries for the poor who did not have access to private banking. The difference being, of course, that the U.S. Money Fund proposal would be dealing with both small retail customers and large businesses and financial institutions.
One aspect of the proposal that could well meet with resistance would come from the primary dealers who would lose some of their intermediary business and therefore lose some of the former revenue from that cost center.
Amar Bhide is a professor at the Fletcher School of Law and Diplomacy at Tufts University and the author of “A Call for Judgment: Sensible Finance for a Dynamic Economy.” Prof. Bhide has contributed analysis and opinion articles to Global Economic Intersection.
Christopher Papagianis is managing director of Economics21, a nonpartisan research institute, and a former special assistant for domestic policy to President George W. Bush.
To Save Money-Market Mutual Funds, Scrap Them (Amar Bhide and Christopher Papagianis, Bloomberg, 13 June 2012)