10 ms·

Money market funds swell by over $273B as investors pull deposits from banks

93 points by VagueMag 4y ago

cloudking 4y ago
When you transfer money to Vanguard it automatically goes into a money market fund, so likely some cash is being parked in brokerage accounts.
- ashconnor 4y ago
  Annoyingly so if you are doing a Backdoor Roth Conversion. Now I'm filing extra paperwork for the $1 interest that is taxed.
  - dmoy 4y ago
    It's exactly the same amount of paperwork you always need to file for a backdoor Roth. It just means you end up with a $1 on a specific line of 8606 that would otherwise be a zero. You'd still need to fill out 8606 either way.
mdorazio 4y ago
Title is technically accurate, but kind of weird. Investors are pulling money out of some (smaller) banks and transferring them to other banks. Or are pulling money out of savings/checking accounts and adding them to money market accounts with different risk profiles. The title implies the banking sector is at risk, but that's not what's happening - the big banks are getting bigger.
- mindslight 4y ago
  Basically what everyone expected to happen when the Fed bailed out [0] the depositors of SVB while also continuing to be cagey about FDIC coverage limits. The right answer is to expand the scope of FDIC coverage to all accounts and assess/regulate accordingly, but of course the big banks are happy to continue the lower-regulation fiction so they can privatize higher gains and then socialize the losses when they're "too big to fail". [0] Without seeing how the balance sheet actually works out, it's hard to say how much money the FDIC gave to SVB depositors (if any). But there is certainly a massive difference between a few weeks of ambiguity and the FDIC quickly asserting that all depositors will be made whole.
- bravo22 4y ago
  Money markets also invest in highly liquid instruments so their prices are marked to market daily and traded faster than HTM portfolios. Therefore they get to adjust faster to macro conditions to ensure that the dollar amount of the asset is maintained.
- sgent 4y ago
  Definitions are hard. They are pulling them out of banks and investing them in mutual funds which hold T-Bills or maybe commercial paper. Money Market Mutual Funds MMMF and Bank Mutual Funds (a savings account with checks) are different things.
fdr 4y ago
I've never understood why people did not use money market funds more often. While the worst stuff that can happen is Not Great (e.g. taking a 3% haircut in the worst failings in the past, with underlying bonds of up to a couple years of duration), the modern ones that use treasury and agency debt with underlying maturities of 90 days or less ought to have a pretty blunt downside, even if they must liquidate or gate redemption. You could also consider a super-short treasury ETF, like BIL. The systemic problem with Money Market Funds in the economy at large is they are too simple a lending device (which is why overheads are so low), as the safest bank-like ones invest in safe, very short-dated, super liquid federal securities, and the whole point of having a bank is to create debts that are riskier and weirder than that (for example, financing an office building). https://clsbluesky.law.columbia.edu/2023/03/20/financial-institution-innovation-needed-in-silicon-valley/ https://clsbluesky.law.columbia.edu/2023/03/20/financial-ins... ponders some options to allow banks to do this while mitigating bank runs and having a more legible sharing of risk with the depositor/investor. If (uninsured) risk is supposed to be correlated to return, then it would also suggest banks really ought to be offering higher yields than money markets for uninsured deposits. Like, significantly. This has not been the case, so I've never relied on deposits for anything more than a payment clearing utility.
- bradleyjg 4y ago
  This problem exists because the short term risk free rate is too high (which is turn is because government debt is too high). If short dated treasuries and near treasuries were paying the near nothing they should be, then entities would have to figure how much they *really* need to keep in instantly available, no risk accounts.
  - fdr 4y ago
    Is it too high? These rates tend to track inflation pretty closely, to the extent the former has a definition. The short-dated government stuff (and the floating price of repurchase agreements) is probably roughly maintaining consumptive power, perhaps even a little less since everyone wants to buy it. The time value of nominal money at the risk free rate is set both at auction and moment to moment via these mechanisms, so I'm not sure what "too high" means here.
DebtDeflation 4y ago
Money Market Deposit Accounts are insured by the FDIC and have the same $250K insurance limit as savings accounts. To the extent that money market accounts may pay a slightly higher interest rate than savings accounts, it's because they typically require a higher initial deposit and a higher minimum balance. Moving funds from a savings account to a money market account because you're worried about deposit insurance makes no sense. Now, if they're talking about Money Market Mutual Funds as opposed to Money Market Deposit Accounts, those are NOT FDIC insured and typically have more restrictions on how quickly and how frequently you can withdraw money, and in exchange pay a slightly higher interest rate still.
- dboreham 4y ago
  Perhaps the recent news just prompted people to take some time to manage their deposits for higher yield.
- dkjaudyeqooe 4y ago
  Just buy Treasury bills. They're backed by the backer of the FDIC. Go directly to the source of all financial security. They're "risk free".
  - capableweb 4y ago
    Doesn't that suffer from some of the same risks as what brought SVB down? I'm not super educated when it comes to the US financial system, so probably high chance I'm wrong. But as far as I understand it, T-bills suffer from the "interest risk" in that if interest rates rise, newer T-bills are more valuable so it'll be harder to sell the ones you have if you want to sell them before they mature. They might also not keep up with inflation, so the inflation could be higher than the yield, meaning you'd lose purchasing power effectively. But again, I might completely misunderstand things, but I don't think there is any investment that is absolutely risk free, which I guess is why you put it in quotation marks in the end.
    - NordSteve 4y ago
      T-bills have very short duration, so interest rate changes have smaller effect on their value. Think of the duration as a lever, the longer the lever the larger the move in value that interest rate change make.
dehrmann 4y ago
In some ways, money market funds are safer than banks because they're not playing the borrow short lend long game. The risk of getting wiped out is also lower, though the risk of getting 95 cents on the dollar is higher.
- bravo22 4y ago
  Which is what businesses should have used instead of putting hundred of millions in a bank. Banks can't magically change economics. Money markets were created exactly for this purpose. This should have been taught to every founder by every VC.
  - dehrmann 4y ago
    (Being serious) should banks as we know them even exist, then? Maybe having them fill a role as an intermediary makes sense, but now that we can securitize loans, why does opaquely connecting short-term lenders directly with long-term borrowers make sense?
    - bravo22 4y ago
      I am going to assume that you are OK with fractional reserve banking so I won't talk about why that is necessary as a function in an economy. If I understand you correctly, you're basically saying why use a bank versus something else? My answer would be because for vast majority of retail bankers it doesn't matter. Same reason many would use Gmail vs self-host. They want to put their money somewhere and ensure that it will be there when they need it. As a society we have a framework around that and we provide deposit insurance and we call the orgs who take your deposit, give you an IOU (in the form of an account balance) then lend a fraction of it to others a bank. For significantly larger sums no I don't think it makes sense to use a bank and most large corps have a treasury that specifically deals with that.
photochemsyn 4y ago
Isn't the fundamental issue here about banks not having raised their the interest rate that's paid to depositors as the Fed has raised those rates? E.g. Bloomberg Feb 23 20324: > "The Federal Reserve has been raising benchmark borrowing rates at the fastest pace in decades, but the interest rate paid out to millions of people with bank accounts is still stuck at almost zero. According to data from Bankrate, the average interest rate on savings accounts is just 0.23%. So what's going on?" It's investment capitalism continuing to transition towards a monopoly model, what else? > "Dougherty said a lack of competition within the financial industry is what allows banks to take more money from their customers without customers getting fed up and moving their money to a competitor or out of the banking system altogether." https://thehill.com/policy/3656474-lawmakers-slam-big-bank-ceos-for-failure-to-increase-interest-rates-on-savings/ https://thehill.com/policy/3656474-lawmakers-slam-big-bank-c... Solution: have the Fed offer the public personal savings accounts at the listed Fed rate, perhaps with some limited restrictions on withdrawals.
- tspike 4y ago
  For what it's worth, you don't have to look far to find online, FDIC-insured savings accounts that are paying out nearly 4% now.
  - NotYourLawyer 4y ago
    … minus taxes on ordinary income.
- civicsquid 4y ago
  This was the main reason I moved my money out of a bank account early during the rate hikes. I was waiting around for a better rate, but even when T-bills were being offered at >2% annually, banks were offering less than a percent. Even competitive savings accounts seemed sluggish. Money market funds were an easy way to get similar rates to T-bills without actually buying them myself or waiting for banks to get the message.
wcoenen 4y ago
This is a reminder that the economy needs a reliable store of value. A CBDC (i.e. everybody gets an account at the central bank) would make sense for this. Ironically, when introduced it might cause bank runs or other stresses for banks though.
- cactusplant7374 4y ago
  What kind of interest would we get?
  - deleted 4y ago
    [deleted]
  - bradleyjg 4y ago
    It shouldn’t get any interest. In fact, there should be a cost of carry. Interest comes from lending money to some entity that want to borrow money. Central banks don’t. Conflating an investment (lending at interest) and a store of value is how we got to the mess we are in.
  - deleted 4y ago
    [deleted]
  - wcoenen 4y ago
    For the Fed, I guess it could be the same as the IORB, currently 4.9%. (But I am not economist, I don't know whether that would work.) https://www.federalreserve.gov/monetarypolicy/reserve-balances.htm https://www.federalreserve.gov/monetarypolicy/reserve-balanc...
- fsckboy 4y ago
  we also need a universe that doesn't die a slow heat death... the same concept in economics is called "there is no free lunch"
- cdnsteve 4y ago
  Cbdc is the last thing we need. Trust of these central governments and banks is clearly lost yet making a new system for them, that no one voted for (cbdc) or was asked about, that gives them complete control over our money is better? No thanks. This is why Bitcoin was created. There is already a solution and the central banks see it as a threat to their power. They are no longer needed.
aquajet 4y ago
Archive: https://archive.is/JIFwG https://archive.is/JIFwG
RivieraKid 4y ago
Slightly off-topic question: which information sources do you recommend for someone who wants to have a good conceptual understanding of economics, finance and investing? Here's what I liked so far: People (their blogs or Twitter): Paul Krugman, Cullen Roche, Lyn Alden, Joseph Wang, Aswath Damodaran, Matthew C. Klein. Books: Macroeconomics by Mankiw, Pragmatic Capitalism, Central Banking 101. Podcast, news websites: I don't follow any.
- bbbbzzz1 4y ago
  If you want the basics then 2 cents by pbs is pretty good. I like the plain bagel on YouTube has he is very level headed and has his cfa and cpa
- VagueMag 4y ago
  My outlook is pretty different from some of the sources you cite, but I like: - Eurodollar University / Jeff Snider - Robert Prechter, mostly for the understanding of money/credit and the fact that asset price movements are an endogenous process which drives headlines, not the other way around. Be careful of the permabear outlook and excessive Elliott Wave woo though. - Financial histories (essential reading IMO): Galbraith's history of the 1929 crash, Jim Grant's stuff, Manias, Panics, and Crashes, Extraordinary Popular Delusions and the Madness of Crowds, etc - Naked Capitalism blog - Karl Marx and Henryk Grossman (the TRPF explains a lot of financial/investing phenomena like stock market cap as % of GDP rising over time) - Podcasts: Market Huddle, Top Traders Unplugged - Minyanville used to be a great source, any of the writers who used to be there are worth checking out.
  - RivieraKid 4y ago
    In what way do you think your outlook is different? The Karl Marx makes me kind of skeptical of the other suggestions...
    - VagueMag 4y ago
      Well, most of the other sources would hate that I think there's something to get out of Marx too! Jim Grant is about as hardcore libertarian as you can get. The longer I watch and trade markets the more I see the value of ideological flexibility and being able to synthesize many different and even contradictory perspectives.

93 points by VagueMag 4y ago

When you transfer money to Vanguard it automatically goes into a money market fund, so likely some cash is being parked in brokerage accounts.

ashconnor 4y ago
Annoyingly so if you are doing a Backdoor Roth Conversion. Now I'm filing extra paperwork for the $1 interest that is taxed.
- dmoy 4y ago
  It's exactly the same amount of paperwork you always need to file for a backdoor Roth. It just means you end up with a $1 on a specific line of 8606 that would otherwise be a zero. You'd still need to fill out 8606 either way.

mdorazio 4y ago

Title is technically accurate, but kind of weird. Investors are pulling money out of some (smaller) banks and transferring them to other banks. Or are pulling money out of savings/checking accounts and adding them to money market accounts with different risk profiles. The title implies the banking sector is at risk, but that's not what's happening - the big banks are getting bigger.

mindslight 4y ago
Basically what everyone expected to happen when the Fed bailed out [0] the depositors of SVB while also continuing to be cagey about FDIC coverage limits. The right answer is to expand the scope of FDIC coverage to all accounts and assess/regulate accordingly, but of course the big banks are happy to continue the lower-regulation fiction so they can privatize higher gains and then socialize the losses when they're "too big to fail". [0] Without seeing how the balance sheet actually works out, it's hard to say how much money the FDIC gave to SVB depositors (if any). But there is certainly a massive difference between a few weeks of ambiguity and the FDIC quickly asserting that all depositors will be made whole.
bravo22 4y ago
Money markets also invest in highly liquid instruments so their prices are marked to market daily and traded faster than HTM portfolios. Therefore they get to adjust faster to macro conditions to ensure that the dollar amount of the asset is maintained.
sgent 4y ago
Definitions are hard. They are pulling them out of banks and investing them in mutual funds which hold T-Bills or maybe commercial paper. Money Market Mutual Funds MMMF and Bank Mutual Funds (a savings account with checks) are different things.

fdr 4y ago

I've never understood why people did not use money market funds more often. While the worst stuff that can happen is Not Great (e.g. taking a 3% haircut in the worst failings in the past, with underlying bonds of up to a couple years of duration), the modern ones that use treasury and agency debt with underlying maturities of 90 days or less ought to have a pretty blunt downside, even if they must liquidate or gate redemption. You could also consider a super-short treasury ETF, like BIL. The systemic problem with Money Market Funds in the economy at large is they are too simple a lending device (which is why overheads are so low), as the safest bank-like ones invest in safe, very short-dated, super liquid federal securities, and the whole point of having a bank is to create debts that are riskier and weirder than that (for example, financing an office building). https://clsbluesky.law.columbia.edu/2023/03/20/financial-institution-innovation-needed-in-silicon-valley/ https://clsbluesky.law.columbia.edu/2023/03/20/financial-ins... ponders some options to allow banks to do this while mitigating bank runs and having a more legible sharing of risk with the depositor/investor. If (uninsured) risk is supposed to be correlated to return, then it would also suggest banks really ought to be offering higher yields than money markets for uninsured deposits. Like, significantly. This has not been the case, so I've never relied on deposits for anything more than a payment clearing utility.

bradleyjg 4y ago
This problem exists because the short term risk free rate is too high (which is turn is because government debt is too high). If short dated treasuries and near treasuries were paying the near nothing they should be, then entities would have to figure how much they *really* need to keep in instantly available, no risk accounts.
- fdr 4y ago
  Is it too high? These rates tend to track inflation pretty closely, to the extent the former has a definition. The short-dated government stuff (and the floating price of repurchase agreements) is probably roughly maintaining consumptive power, perhaps even a little less since everyone wants to buy it. The time value of nominal money at the risk free rate is set both at auction and moment to moment via these mechanisms, so I'm not sure what "too high" means here.

DebtDeflation 4y ago

Money Market Deposit Accounts are insured by the FDIC and have the same $250K insurance limit as savings accounts. To the extent that money market accounts may pay a slightly higher interest rate than savings accounts, it's because they typically require a higher initial deposit and a higher minimum balance. Moving funds from a savings account to a money market account because you're worried about deposit insurance makes no sense. Now, if they're talking about Money Market Mutual Funds as opposed to Money Market Deposit Accounts, those are NOT FDIC insured and typically have more restrictions on how quickly and how frequently you can withdraw money, and in exchange pay a slightly higher interest rate still.

dboreham 4y ago
Perhaps the recent news just prompted people to take some time to manage their deposits for higher yield.
dkjaudyeqooe 4y ago
Just buy Treasury bills. They're backed by the backer of the FDIC. Go directly to the source of all financial security. They're "risk free".
- capableweb 4y ago
  Doesn't that suffer from some of the same risks as what brought SVB down? I'm not super educated when it comes to the US financial system, so probably high chance I'm wrong. But as far as I understand it, T-bills suffer from the "interest risk" in that if interest rates rise, newer T-bills are more valuable so it'll be harder to sell the ones you have if you want to sell them before they mature. They might also not keep up with inflation, so the inflation could be higher than the yield, meaning you'd lose purchasing power effectively. But again, I might completely misunderstand things, but I don't think there is any investment that is absolutely risk free, which I guess is why you put it in quotation marks in the end.
  - NordSteve 4y ago
    T-bills have very short duration, so interest rate changes have smaller effect on their value. Think of the duration as a lever, the longer the lever the larger the move in value that interest rate change make.

dehrmann 4y ago

In some ways, money market funds are safer than banks because they're not playing the borrow short lend long game. The risk of getting wiped out is also lower, though the risk of getting 95 cents on the dollar is higher.

bravo22 4y ago
Which is what businesses should have used instead of putting hundred of millions in a bank. Banks can't magically change economics. Money markets were created exactly for this purpose. This should have been taught to every founder by every VC.
- dehrmann 4y ago
  (Being serious) should banks as we know them even exist, then? Maybe having them fill a role as an intermediary makes sense, but now that we can securitize loans, why does opaquely connecting short-term lenders directly with long-term borrowers make sense?
  - bravo22 4y ago
    I am going to assume that you are OK with fractional reserve banking so I won't talk about why that is necessary as a function in an economy. If I understand you correctly, you're basically saying why use a bank versus something else? My answer would be because for vast majority of retail bankers it doesn't matter. Same reason many would use Gmail vs self-host. They want to put their money somewhere and ensure that it will be there when they need it. As a society we have a framework around that and we provide deposit insurance and we call the orgs who take your deposit, give you an IOU (in the form of an account balance) then lend a fraction of it to others a bank. For significantly larger sums no I don't think it makes sense to use a bank and most large corps have a treasury that specifically deals with that.

photochemsyn 4y ago

Isn't the fundamental issue here about banks not having raised their the interest rate that's paid to depositors as the Fed has raised those rates? E.g. Bloomberg Feb 23 20324: > "The Federal Reserve has been raising benchmark borrowing rates at the fastest pace in decades, but the interest rate paid out to millions of people with bank accounts is still stuck at almost zero. According to data from Bankrate, the average interest rate on savings accounts is just 0.23%. So what's going on?" It's investment capitalism continuing to transition towards a monopoly model, what else? > "Dougherty said a lack of competition within the financial industry is what allows banks to take more money from their customers without customers getting fed up and moving their money to a competitor or out of the banking system altogether." https://thehill.com/policy/3656474-lawmakers-slam-big-bank-ceos-for-failure-to-increase-interest-rates-on-savings/ https://thehill.com/policy/3656474-lawmakers-slam-big-bank-c... Solution: have the Fed offer the public personal savings accounts at the listed Fed rate, perhaps with some limited restrictions on withdrawals.

tspike 4y ago
For what it's worth, you don't have to look far to find online, FDIC-insured savings accounts that are paying out nearly 4% now.
- NotYourLawyer 4y ago
  … minus taxes on ordinary income.
civicsquid 4y ago
This was the main reason I moved my money out of a bank account early during the rate hikes. I was waiting around for a better rate, but even when T-bills were being offered at >2% annually, banks were offering less than a percent. Even competitive savings accounts seemed sluggish. Money market funds were an easy way to get similar rates to T-bills without actually buying them myself or waiting for banks to get the message.

wcoenen 4y ago

This is a reminder that the economy needs a reliable store of value. A CBDC (i.e. everybody gets an account at the central bank) would make sense for this. Ironically, when introduced it might cause bank runs or other stresses for banks though.

cactusplant7374 4y ago
What kind of interest would we get?
- deleted 4y ago
  [deleted]
- bradleyjg 4y ago
  It shouldn’t get any interest. In fact, there should be a cost of carry. Interest comes from lending money to some entity that want to borrow money. Central banks don’t. Conflating an investment (lending at interest) and a store of value is how we got to the mess we are in.
- deleted 4y ago
  [deleted]
- wcoenen 4y ago
  For the Fed, I guess it could be the same as the IORB, currently 4.9%. (But I am not economist, I don't know whether that would work.) https://www.federalreserve.gov/monetarypolicy/reserve-balances.htm https://www.federalreserve.gov/monetarypolicy/reserve-balanc...
fsckboy 4y ago
we also need a universe that doesn't die a slow heat death... the same concept in economics is called "there is no free lunch"
cdnsteve 4y ago
Cbdc is the last thing we need. Trust of these central governments and banks is clearly lost yet making a new system for them, that no one voted for (cbdc) or was asked about, that gives them complete control over our money is better? No thanks. This is why Bitcoin was created. There is already a solution and the central banks see it as a threat to their power. They are no longer needed.

aquajet 4y ago

Archive: https://archive.is/JIFwG https://archive.is/JIFwG

RivieraKid 4y ago

Slightly off-topic question: which information sources do you recommend for someone who wants to have a good conceptual understanding of economics, finance and investing? Here's what I liked so far: People (their blogs or Twitter): Paul Krugman, Cullen Roche, Lyn Alden, Joseph Wang, Aswath Damodaran, Matthew C. Klein. Books: Macroeconomics by Mankiw, Pragmatic Capitalism, Central Banking 101. Podcast, news websites: I don't follow any.

bbbbzzz1 4y ago
If you want the basics then 2 cents by pbs is pretty good. I like the plain bagel on YouTube has he is very level headed and has his cfa and cpa
VagueMag 4y ago
My outlook is pretty different from some of the sources you cite, but I like: - Eurodollar University / Jeff Snider - Robert Prechter, mostly for the understanding of money/credit and the fact that asset price movements are an endogenous process which drives headlines, not the other way around. Be careful of the permabear outlook and excessive Elliott Wave woo though. - Financial histories (essential reading IMO): Galbraith's history of the 1929 crash, Jim Grant's stuff, Manias, Panics, and Crashes, Extraordinary Popular Delusions and the Madness of Crowds, etc - Naked Capitalism blog - Karl Marx and Henryk Grossman (the TRPF explains a lot of financial/investing phenomena like stock market cap as % of GDP rising over time) - Podcasts: Market Huddle, Top Traders Unplugged - Minyanville used to be a great source, any of the writers who used to be there are worth checking out.
- RivieraKid 4y ago
  In what way do you think your outlook is different? The Karl Marx makes me kind of skeptical of the other suggestions...
  - VagueMag 4y ago
    Well, most of the other sources would hate that I think there's something to get out of Marx too! Jim Grant is about as hardcore libertarian as you can get. The longer I watch and trade markets the more I see the value of ideological flexibility and being able to synthesize many different and even contradictory perspectives.