Straight Story: Fall of the money market
Economics Editor Chris Farrell traces the rise and fall of the money market account, and explains why he's putting his extra cash into a good, old savings account.
Economics editor Chris Farrell (American Public Media)
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TEXT OF COMMENTARY
TESS VIGELAND: One of the most fundamental questions that came out of last fall's economic meltdown was, is my money safe anywhere?
As our 401ks imploded and our banks teetered on the brink of collapse, we actually wondered if it was time to go to the mattresses. Money we had in the stock market simply vanished. But savings and checking accounts stayed safe. Another traditionally safe haven, however, failed us.
And in this week's Straight Story, economics editor Chris Farrell says it's time to say bye-bye to the money market mutual fund.
Chris Farrell: The other day I had some extra savings. It's money I can't afford to lose. Over the past three decades, I would have put it into my money market mutual fund without even thinking. Yet I sent the money to my bank savings. I had closed my money fund earlier this year and I won't open up another.
The reason is that money market funds are no longer a safe enough parking place for cash. The industry doesn't want to acknowledge it. Regulators are trying to avoid the issue. Yet for many conservative savers it's simply too risky a product.
It's hard to imagine now, but the money fund was one of the great innovations from the Age of Inflation. In the late '70s and early '80s, it was the hottest investment for middle class savers. Regulations at the time prevented banks from offering savers anything over 5.25 percent. But market interest rates were at double-digit levels. Money funds could pay those rates -- 11 percent, 12 percent and so on.
Long-time financial journalist Joseph Nocera says the question at the time wasn't, "Do you dare to risk your money in such a fund?" It was, "How could you not risk your money in a money fund?" In 1980, investors had poured $84 billion into money funds. Two years later, that sum had swelled to $200 billion.
Money funds gradually evolved into a staid investment haven for cash. The industry pledged that a dollar invested in a money fund would be worth a dollar no matter what. It worked for a long time.
That is, until the fall of last year. The industry broke its word during the darkest days of the credit crunch. When money market fund values started falling below a buck, taxpayers had to rescue the industry.
You can't trust the money fund "We won't break a buck" pledge anymore. How do we know our savings won't vaporize during the next financial crisis? We don't. The money in a fund is at risk.
Yes, I know, the SEC has proposed several changes to boost investor confidence, but these are minor reforms.
There are good ideas out there. Jane Bryant Quinn, the dean of personal finance journalists, recently got to the core of the issue. She called for a dramatic overhaul of the business. Money funds that want to say a dollar is a dollar should become like banks with government insurance. Funds that don't want to go that route should say share values will fluctuate. There's nothing wrong with that. Just make it clear that there's a speculative element to the investment.
It's frustrating that once again the interests of consumers and savers aren't front and center with Wall Street regulators and industry leaders. For now, I trust the Federal Deposit Insurance Corporation. I know my emergency savings are guaranteed even if my bank goes belly up. The same can't be said for money funds. That's why I've decided to label money funds the "Caveat Emptor Product of the Week."
Comments
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08/08/2009
Money market funds are no longer a safe enough parking place for cash but banks are safe? I disagree. Taking out $1 for the $1 you deposited gives you peace only if you measure in dollars. If you measure in purchasing power, for example, gallons of milk, or bottles of shampoo, you never get the same amount out plus interest. Paper value is not as meaningful as purchasing power. If you look at purchasing power, bank deposits are not safe either.
It just so happens right now some banks are paying more than money market funds do, because banks are in bad shape and they need money. When they fall behind money market funds in the future, are you going to move back to money market funds?
From Sacramento, CA, 08/03/2009
Jane Bryant Quinn always has something interesting to say. If you’d like an opportunity to hear her speak, and will be in the Northern California area, check out Perspectives 2009-Sacramento’s premier speaker’s forum. For more information visit http://bit.ly/1DB2PU
From rochester, MN, 08/03/2009
Could you please answer the comment from Maple Grove? I also thought that money markets were insured the same as bank savings by the government. The money market I have has a FDIC insured stamp. Thank you for addressing this.
From Atlanta, GA, 08/02/2009
I have seen that the money I contribute to 401K goes to Money-Market account, unless I want to other funds. I want to play it safe, so now if Money Market accounts are not safe, what are my options regarding my 401K contributions.
From Westborough, MA, 08/01/2009
Money market mutual funds still have the best record of safety of any "cash" investment, including bank deposits. While both money funds and bank deposits needed extra government support during the liquidity panic of late 2008, the record still shows that savers and investors have little to worry about regarding money funds' safety. And historically they've been paid handsomely in yield, liquidity and convenience for taking on what's turned out to be a miniscule amount of incremental risk over FDIC insured options.
Sincerely,
Pete Crane
President, Crane Data LLC
http://www.cranedata.com
From Maple Grove, MN, 08/01/2009
I thought that the Federal goverment temporarily insured deposits in money market mutual funds. If is so, when does the insurance lapse? Isn't the deposits "safe" until then?
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