I spent a long time going over the Wall Street Journal this morning just trying to get a handle on the greatest governmental intervention into our economy – ever! The Wall Street Journal says this is a new chapter in capitalist economic theory since our government is basically behaving like a socialist government.
I wrote before wondering what triggered the government action which by the way is to buy up all bad mortgage based debt in the country, yes, the whole country, giving financial institutions a clean slate to start over from. This kind of reminds me of the biblical “scapegoat” concept where all the sins of a community are heaped onto the goat as it is driven off into the wilderness to die, leaving the community free of sin and ready to start over again.
Anyway, what broke the camel’s back was a run on “money market mutual funds”. These are the funds that many of us keep our “liquid” money in because they are super safe and pay a lot more in interest than a typical bank savings account. The bank savings account though is FDIC insured up to $100,000 while the brokerage money funds are not.
What spooked investors in these super safe money market accounts was the action of the $62 Billion Reserve Primary Fund which held a lot of Lehman Brothers debt (Lehman Brothers recently declared bankruptcy) forcing the fund to “break the buck” taking the practically religious $1.00 / share net asset value to $0.97. This has never happened in my lifetime and was enough to cause a run on the fund and then moved to other money market funds. The Reserve Primary Fund suspended redemptions, causing even more panic.
Henry Paulson, our Secretary of the Treasury, saw that these super safe money market funds had to pay out money by selling their assets at fire sale prices at an alarming rate. Since they are paying out, they are not purchasing any new debt and I have learned, money market funds basically keep businesses in business and when they are not purchasing short term debt, business will come to a screeching halt if not our entire economy and this is what made Paulsen act so quickly.
Paulsen quickly put in place a temporary federal guarantee (like FDIC) on money market mutual funds; something only available to banks previously. The redemptions, which totaled 145 Billion so far, slowly came to a halt and disaster was averted.
Paulsen realized that the economy needed a systemic fix or panic attacks will occur more and more frequently as other financial institutions bite the dust and thus the unprecedented bailout of our entire economy.
But this will not be so easy and people are starting to argue already. More to come…
I wrote before wondering what triggered the government action which by the way is to buy up all bad mortgage based debt in the country, yes, the whole country, giving financial institutions a clean slate to start over from. This kind of reminds me of the biblical “scapegoat” concept where all the sins of a community are heaped onto the goat as it is driven off into the wilderness to die, leaving the community free of sin and ready to start over again.
Anyway, what broke the camel’s back was a run on “money market mutual funds”. These are the funds that many of us keep our “liquid” money in because they are super safe and pay a lot more in interest than a typical bank savings account. The bank savings account though is FDIC insured up to $100,000 while the brokerage money funds are not.
What spooked investors in these super safe money market accounts was the action of the $62 Billion Reserve Primary Fund which held a lot of Lehman Brothers debt (Lehman Brothers recently declared bankruptcy) forcing the fund to “break the buck” taking the practically religious $1.00 / share net asset value to $0.97. This has never happened in my lifetime and was enough to cause a run on the fund and then moved to other money market funds. The Reserve Primary Fund suspended redemptions, causing even more panic.
Henry Paulson, our Secretary of the Treasury, saw that these super safe money market funds had to pay out money by selling their assets at fire sale prices at an alarming rate. Since they are paying out, they are not purchasing any new debt and I have learned, money market funds basically keep businesses in business and when they are not purchasing short term debt, business will come to a screeching halt if not our entire economy and this is what made Paulsen act so quickly.
Paulsen quickly put in place a temporary federal guarantee (like FDIC) on money market mutual funds; something only available to banks previously. The redemptions, which totaled 145 Billion so far, slowly came to a halt and disaster was averted.
Paulsen realized that the economy needed a systemic fix or panic attacks will occur more and more frequently as other financial institutions bite the dust and thus the unprecedented bailout of our entire economy.
But this will not be so easy and people are starting to argue already. More to come…
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