>> Doug Noland makes a good argument that money market funds have
>> become money creators not subject to reserve requirements.
>They aren't subject to regulatory requirements the way normal
>deposits are, but they are still limited by the kind of normal
>sense a manager would have over trying to keep the $1/share price.
Agreed, but the experience of secondary banking systems in the UK, Scandinavia and elsewhere suggests that this is not a particularly strict limit.
>Can a MM fund blow up? Sure, if there's a run on it. But if
>there's a big run, there's bigger problems to worry about than
>these guys who want to make a few basis points on the overnight
>rate. Hard to believe the tedium, but there are actually guys out
>there whose job it is to buy short-dated paper all day every day.
This is actually a major application for the trading machines we were talking about. I don't know about the US, but Brit money-brokers have a fearsome reputation for being the rock-apes of the financial sector; the hardest drinkers, foulest language etc. The Inland Revenue recognises that they burn out incredibly quickly -- IIRC, the age at which a moneybroker can realise his pension fund is younger than for a professional dancer.
>Anyway, in any extreme crisis it's unlikley those funds would be
>tapped (I guess BofA considered it briefly when it's investment in
>David Shaw went south during the same time as LTCM; outrage was
>high and they quickly moved away from that idea). When Citron blew
>up Orange County, it was actually the tax-free MM funds who did
>well in the scavenger hunt that happened as they unwound his
>positions: Fidelity's CA Tax-Free MM fund went, for a few weeks
>from something like 3.1% to 5.2% ... you can't say those holders
>weren't happy to see a bigger yield that month.
Not sure what you mean by "tapped" in this case -- as mutual fund is a distinct legal entity from its manager and absolutely cannot be used as a piggy bank in times of crisis. The model for default of a mutual fund is the one you allude to above -- major displacement in the bond market --> illiquidity --> deposit run.
Re: Are mutual funds money? -- all I can say is that something which can be converted into money at zero notice, with no penalty, is as close to money as makes no odds. It's not notes and coin, and Mike P. is right to say that the Fed has a very good handle on it (though monitoring monetary aggregates has gone right out of style in these Taylor-rule days). But it is money. And since the instruments which MMMFs invest in are longer dated and less liquid than their liabilities, I'm also not inclined to argue whether they are banks or not. A quick read of Kasriel's research (linked to in Enrique's post) reveals that, if true, it would have the implication that *banks* can't create credit on their own, either, since "bank" can be substituted for "GSE" throughout without any problem. So the sense in which "Greenspan & Co are the only ones who can create credit" is a pretty uninteresting one.
d^2
/jordan
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