Break the Buck!
By David Henderson
Regulators are completing a controversial proposal to shore up the $2.7 trillion money-market fund industry, more than three years after the collapse of Lehman Brothers Holdings Inc. sparked a panic that threatened the savings of millions of investors and forced the federal government to intervene.
This is the lead paragraph from a Wall Street Journal article today, “U.S. Sets Money-Market Plan,” by Andrew Ackerman and Kirsten Grind. It’s about some proposed regulations for money-market funds.
First, note their use of the word “forced.” That panic didn’t force the federal government to do anything. The feds chose to intervene. But by using the word “forced,” the reporters make it sound as if the regulators are trying to avoid ever being “forced” into something again.
Second, the panic arose because, in 2008, the money market funds were trying to hold on to a $1 per share value and it looked as if they might not be able to. So many people, including me, quickly took their founds out at the $1 per share value to avoid a small haircut. But shares in money market funds are not, repeat, are not like checking accounts or savings accounts. The people who own the funds have no legal obligation to give $1 when you redeem. If earnings fall enough, they might be able to afford only 99 cents or 98 cents or 97 cents. This is called “breaking the buck.”
Had the feds not intervened by shoring up the money-market funds, some of the money-market funds would probably have had to cut to a number like 98 or 97 cents. That would have stopped most of the panicked withdrawals. And many people would have learned, or been reminded of, the difference between a checking account and a money-market fund.
Instead, the SEC proposes to stick with moral hazard and add the further regulation that government-caused moral hazard often leads to.