Deposit insurance for money funds

By Philip Brewer on 19 September 2008 (Updated 1 October 2008) 4 comments
Photo: US Treasury

Early this morning, the Treasury announced deposit insurance for money market mutual funds, provided that the fund pays a fee.  The money to provide the insurance will come from the Exchange Stabilization Fund (the government account holding the profits that the federal government realized when they seized everyone's gold in 1934).

According to the Treasury's press release, the program is supposed to be temporary, lasting one year.

Personally, I think this is a terrible idea.  Money funds complete on two issues: 

  1. Return
  2. Security of principal

There's a certain tension between those two, with extra return always entailing extra risk to principal.  If the principal is insured, the incentives will shift--all funds will be secure, so they'll only be competing on return.  That will push fund managers to invest in the riskiest assets that are allowed, which is a sure strategy for trouble ahead.

[Update 29 September 2008:  The Treasury has released details on the program.]

5
Average: 5 (1 vote)
Your rating: None
ShareThis

comments

4 discussions

Add New Comment

CAPTCHA
This test helps prevent automated spam submissions.
Guest's picture
Guest

I agree with you - I guess that the government does not...
http://www.foxnews.com/story/0,2933,425261,00.html

Guest's picture
Kelja

Today, the U.S. officially becomes a Socialist Nation. Yes, we've been headed that direction for some time now, but today it's official.

What I find amazing - and not many seem to be objecting to - is that 2 men - Bernacki & Paulson, one the head of a consortium of banks (The FED) and the other an appointed bureaucrat - have engineered this takeover using taxpayer dollars and debt.

A truly frightening and sad day for this land where once liberty was sacred.

I know that the 'Masters of the Universe' are telling everyone this was a decisive action, a necessary action, taken to save the financial system. To save us. And, perhaps that's true.

But, what it will ultimately mean is a tsunami of inflation will be hitting our shores.

Inflation happens when oceans of paper money generated out of thin air chase limited goods and supplies. Google Weimar Republic.

Guest's picture
andys2i

This will just increase expense ratios of the funds and make their returns less rewarding. Even taking out the FDIC insurance argument, as a straight investment decision on-line savings accounts are a better investment than most money market funds at the current time because their APY's are higher (0.5% difference). This is why I moved my prime money market funds to my high yield online savings account

Guest's picture

Well as every deal takes a pro's and con's for it. The risk in taking the responsibility and the advantage of prior agreements are both in the hands of the beneficiaries. Delivering a very strategic management over our funds is our defense against the deviation and uncertainties in the market.