Paul Volcker clearly wasn’t kidding when he said the most important banking innovation in the last 30 years was the ATM. Although money market funds go back further than that, to the early 1970s, Tall Paul is not so keen about them either. This isn’t the first time he had gone after money funds, and he is not dropping the topic. But it does not appear that Team Obama is backing this idea.
I wonder if his antipathy goes back to his days as Fed chair. Volcker used money supply targets to rein in inflation, but found in 1982 that they were becoming unreliable due to….money market funds.
The logic behind going after money market funds is the blow up of Reserve Fund as a result of the Lehman failure. But of all the areas of finance, money market funds have not exactly been high on the list of problems. Not that my opinion counts for much, but money market funds does not make my top ten list of banking reform areas. By contrast, CDOs blew up in the 1990s and then made an even more impressive reprise this century. Because they have extraordinary leverage, the damage they do is well out of proportion to the size of the market. . Repos are a form of banking, played a big role in cross market transmission during the crisis (haircuts rose sharply) and is much bigger in aggregate than money market funds ($10 trillionish). From Bloomberg:
Paul Volcker, the former Federal Reserve chairman who is an adviser to President Barack Obama, said money-market mutual funds undermine the strength of the U.S. financial system and should be regulated more like banks.
“Banks remain the functioning heart of the financial system, and they are protected and regulated,” Volcker said in a telephone interview last week from his New York office. “To the extent they have competitors that have different ground rules, kind of free-riders in my view, weakens the financial system.”
Money-market mutual funds, which first appeared in 1971, have developed into a $3.5 trillion pool of cash outside of the regulated banking industry that provides short-term funding to thousands of companies and financial institutions at rates below conventional loans. Their pivotal role in the economy was highlighted in September when the collapse of the $62.5 billion Reserve Primary Fund sparked a run by investors that in turn froze the commercial-paper market and threatened to cut off thousands of borrowers.
Needless to say, the industry does not like the sound of this:
His proposals “would eliminate money funds as we know them,” Paul Schott Stevens, head of the Investment Company Institute, a mutual-fund industry trade group in Washington