Failing Money Market Funds and Dysfunctional Regulation

Money market funds had trouble during the Panic of 2008, and Federal regulators felt like they had to justify their jobs by Doing Something. So by 2014, they developed and adopted a rule that, in essence allowed money market funds to tell their investors that they couldn’t have their money back under certain fund- and SEC-determined conditions. For the investors’ own good.

Fast forward to the then-active Wuhan Virus situation in early spring 2020, and money market funds found themselves in trouble again. Enter the Gotta Do Something regulators again. This time the international consortium that is the Financial Stability Board (created in the panicky aftermath of that Panic and to which then-President Barack Obama (D) surrendered much of our financial regulatory sovereignty) is contemplating

proposals would discount the value of shares in money funds when lots of investors all want to cash them in simultaneously.

Telling investors they can’t have all of their money back when they need it most. For their own good because the money market fund “needs” their money more, and the money market fund’s “needs” are more important.

Think about that.

Think, next, about a couple of alternatives. One would be to require money market funds to hold a measure of cash capital in reserve and separate from investors’ money. But that’s those regulators, again.

Another would be to let the money market fund that finds itself in trouble go ahead and fail. Let several of them fail. Certainly, that will be painful in the moment, and for more than those funds and unlucky or bad judgment investors. But it also would be the only time, as the industry would be forced by free market imperatives to clean itself up. That would result in far less pain in the medium- to long-term.

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