Wednesday, February 08, 2012

End the Money Market Fund

According to Megan McArdle, new rules may put money market funds out of business:
At last, the government is proposing new rules, which are supposed to make MMFs less risky. The funds would have to raise new capital, and some minor withdrawal limitations would be imposed on customers. They would also have to offer a floating net asset value instead of the current "guarantee" that if you deposit a dollar, you'll always get at least that dollar back...

...If passed as proposed, the rules would seemingly put the MMFs out of business. And perhaps that's the point--Paul Volcker, for one, has been an outspoken critic of money market funds, which originated as a way to dodge the interest rate caps on bank accounts during the inflationary 1970s."
There shouldn't be money market funds. There should be unlimited FDIC insurance on all bank accounts. It should be easy to "put a dollar in, get a dollar bank" (with no guarantee as to what that dollar will get you).


Blogger Ohm (Ώ) said...

"put a dollar in, get a dollar back" (with no guarantee as to what that dollar will get you).

this thought appeals to Gov responsibility of helping your portfolio should it have stcoks, corporate bonds, Gov bonds or MMFs.

However, even the FDIC insurance need not be unlimited. Just correlated to one's age. I'd say something like $4,000*your age...across all Bank Accounts (not per bank account) at that...just encourage/help staying safe as one gets older.

2:22 PM  
Blogger Ralph Musgrave said...

FDIC makes no sense in that what is being insured is a COMMERCIAL activity: that is, depositing money in a bank which then lends the money on to less than 100% safe borrowers.

Why no “FDIC” for people who invest in the stock market or gamble at Las Vegas?

Bank accounts should be split into two types. First 100% safe accounts where the money CANNOT be loaned on: perhaps the money should be lodged at the central bank. Little or no interest would be earned. That money WOULD BE insured. And depositors would have instant access to their money.

Second, there ought to be “investment” or “commercial” accounts. Those would involve no government sponsored insurance, but the accounts WOULD earn a decent rate of interest. And to reflect the fact that the money had been put into long term loans, instant withdrawal of such money should be illegal. In other words Regulation Q (banning the payment of interest on demand deposit accounts) was a good idea: that was the regulation that money market funds were originally designed to get round.

11:27 PM  
Blogger Ohm (Ώ) said...

Interesting post Ralph. Difficult to qualify it on principle.
the one problem wld be that do we want to leave a man's old age safe savings fully at the mercy of the inflation rate?

11:53 AM  
Blogger Ohm (Ώ) said...

unfortunately, old age, when you cannot work and yet have living expenses, is a reality. and, in the modern World, the children do not necessarily take responsibility of seeing their parents thru' their golden years, while some people do not have children in the first place.

11:55 AM  
Blogger Ohm (Ώ) said...

..So there ought to be one guaranteed risk free (and low returns) option in the 401K programmes as well (assuming the 401 K system stays), with protection level correlated with age I wld say, with a unified protection limit for a person across all such (few) protected avenues.

12:25 PM  
Blogger Ralph Musgrave said...

Ohm, Re pensioners’ savings being eaten away by inflation, you make a good point. There probably isn’t a strictly economic case for government organised inflation proofed savings accounts. But for the benefit of the not very financially sophisticated, there is probably a sort of “human rights” case.

10:32 PM  
Blogger winterspeak said...

RALPH: Banks do not lend out deposits. Banks make loans, which create deposits, which the banks then accept. The loans are backed by equity put in by bank investors.

Since banks do not lend out deposits, FDIC insurance is in no way a subsidy. Having limited FDIC insurance just creates mechanisms for banks to set up and profit from "heads I win, tails you lose" games.

7:18 AM  
Blogger Greg said...

Off topic comment here;

Winter, I sure would love to see your input in this thread

I like how these guys are trying to get some of MMTs claims a little more fleshed out.

7:35 PM  

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