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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

by 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.
  - bradleyjg 4y ago
    Too high in this context means not socially optimal. To the extent there’s hard, inelastic demand for an absolutely safe place to park cash perhaps it is more efficient to have the government offer such instruments than any other entity. However, to the extent the terms are more attractive than they “should” be, and satisfying soft, elastic demand, that’s money that’s being pulled away from productive investments.
    - fdr 4y ago
      While very few arrangements are optimal, I personally don't see how this is a good example. It seems like your assessment, as so far elaborated, is equivalent to "the government should not issue bonds." My opinion on equilibrium: government should always be providing the most secure credit, at some level of issuance, that wouldn't be true, best not to get there.
- ac29 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). This doesn't make sense. If government debt is too high, they should want the interest rates to be low, not high.
  - bradleyjg 4y ago
    The more debt you have to sell the higher the interest rate you need to offer to clear the market.
    - chii 4y ago
      only if there's not enough buyers for the debt you want to sell. For the US gov't, it doesnt seem like it.
      - bradleyjg 4y ago
        What’s your explanation for why the 26 week T bill is 4.56% rather than say 2% or 1%? The government just felt like paying more?
sir0010010 4y ago
"the whole point of having a bank is to create debts that are riskier and weirder than that" I actually think the average person (or business) would disagree with this statement. The reason most businesses and individuals deposit money in a bank is first, to keep it safe and second, to make your funds available to send and receive payments without managing large piles of cash. This can be done without lending at all (see narrow banks) and in that case the bank can simply let everyone withdraw their money in the event of a run. Financing an office building could be done by a separate institution that sells bonds and then loans those funds to businesses at higher interest rates. This institution would be able to make the duration of its bonds match the loans it makes to customers.
- fdr 4y ago
  While I agree there are some issues with how banks comingle a pretty complex stack of claimants and assets, that's how things have been for a few hundred years, so...the average person/business person...(if you are right about them)...is wrong, and will be wrong for the foreseeable future. While I generally would support a direct Fed facility to handle the "utility" portions of banking, I think there are some dubious aspects and limitations of non-lending accounts. Namely, almost hydraulically, lending on something like treasuries tends to gracefully track inflation, i.e. consumptive power is maintained over time. This is another meaning for a bank to "keep your money safe" if you account for the money illusion. They aren't called "money markets" for nothing.
quags 4y ago
Interest rates have been low since 2008. Money markets were popular before then but we’re paying tony amounts for years. Same goes for bank cds. This is one reason for such a bill market run in stocks with money chasing yield going into stocks. A money market at near zero vs Verizon paying 4% was seen as a better deal. Only in the last year has cds and money markets come back into favor and there is a large move into them.

by fdr 4y ago

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.
- bradleyjg 4y ago
  Too high in this context means not socially optimal. To the extent there’s hard, inelastic demand for an absolutely safe place to park cash perhaps it is more efficient to have the government offer such instruments than any other entity. However, to the extent the terms are more attractive than they “should” be, and satisfying soft, elastic demand, that’s money that’s being pulled away from productive investments.
  - fdr 4y ago
    While very few arrangements are optimal, I personally don't see how this is a good example. It seems like your assessment, as so far elaborated, is equivalent to "the government should not issue bonds." My opinion on equilibrium: government should always be providing the most secure credit, at some level of issuance, that wouldn't be true, best not to get there.
ac29 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). This doesn't make sense. If government debt is too high, they should want the interest rates to be low, not high.
- bradleyjg 4y ago
  The more debt you have to sell the higher the interest rate you need to offer to clear the market.
  - chii 4y ago
    only if there's not enough buyers for the debt you want to sell. For the US gov't, it doesnt seem like it.
    - bradleyjg 4y ago
      What’s your explanation for why the 26 week T bill is 4.56% rather than say 2% or 1%? The government just felt like paying more?

sir0010010 4y ago

"the whole point of having a bank is to create debts that are riskier and weirder than that" I actually think the average person (or business) would disagree with this statement. The reason most businesses and individuals deposit money in a bank is first, to keep it safe and second, to make your funds available to send and receive payments without managing large piles of cash. This can be done without lending at all (see narrow banks) and in that case the bank can simply let everyone withdraw their money in the event of a run. Financing an office building could be done by a separate institution that sells bonds and then loans those funds to businesses at higher interest rates. This institution would be able to make the duration of its bonds match the loans it makes to customers.

fdr 4y ago
While I agree there are some issues with how banks comingle a pretty complex stack of claimants and assets, that's how things have been for a few hundred years, so...the average person/business person...(if you are right about them)...is wrong, and will be wrong for the foreseeable future. While I generally would support a direct Fed facility to handle the "utility" portions of banking, I think there are some dubious aspects and limitations of non-lending accounts. Namely, almost hydraulically, lending on something like treasuries tends to gracefully track inflation, i.e. consumptive power is maintained over time. This is another meaning for a bank to "keep your money safe" if you account for the money illusion. They aren't called "money markets" for nothing.

quags 4y ago

Interest rates have been low since 2008. Money markets were popular before then but we’re paying tony amounts for years. Same goes for bank cds. This is one reason for such a bill market run in stocks with money chasing yield going into stocks. A money market at near zero vs Verizon paying 4% was seen as a better deal. Only in the last year has cds and money markets come back into favor and there is a large move into them.