Deposit insurance for money funds

Philip Brewer — Fri, 19 Sep 2008 12:12:23 +0000

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:

Return
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.]

This article is from Philip Brewer of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: