The following editorial appeared recently in the Kansas City Star:
One of the worst moments in the panic of 2008 was the day a money market mutual fund "broke the buck" and its per-share value dropped below $1. Frenzied withdrawals swept the industry, and $300 billion quickly vanished from such funds — a run that was only stopped when the Treasury stepped in with a guarantee.
The nation's financial markets will always be fragile if too many players operate on the assumption that in a crisis the taxpayer will rush in to pick up the slack. That may end today's crisis, but it will lead to tomorrow's because bailouts breed more risk.
To make that message clear, the industry should move away from the holy grail of the perpetual $1 share price. A money fund's value should fluctuate, just as prices do for any other mutual fund. That's what outgoing Securities and Exchange Commission chairwoman Mary Shapiro advocates, but she has been unable to win SEC approval for the change. Among the three options being debated in Washington, she says varying share prices is the simplest and purest reform. She's right.
Money market funds hold about $2.6 trillion in assets in accounts owned by millions of people, but those individuals should know they are investors, not "depositors." They should see the value of their holdings fluctuate with the value of the underlying assets. In the process, capital will tend to flow to the strongest institutions.
The other two proposals under consideration are a bit more complicated. Both would allow a continuous $1 share price but require money funds to set aside back-up reserves.
The newly created Financial Stability Oversight Council is pushing the SEC to get off the dime and approve tougher money fund reforms to reduce taxpayer risk. With that in mind, the oversight council has invited comment on the three options. If the SEC fails to move, the oversight council could designate certain funds as "systemically important" and subject them to even stiffer regulation. Naturally, most of the industry is opposed to such changes. If money fund share prices fluctuate, some of the money fund cash will migrate to insured bank deposits.
Another point to consider is the role of money funds in financing the Wall Street mortgage bubble. In a paper published last year, former Kansas City Federal Reserve president Tom Hoenig and Charles Morris, vice president and economist, pointed out that the implicit government guarantee of money funds provided a virtual subsidy that helped finance the "shadow banking" system in which the Wall Street mortgage machine operated.
Keeping it simple is best. Let prices fluctuate and deliver the signals about safety and return that prices are supposed to send.