It will not happen to me. Guess What? It Will !!!

Chapter 11

Chapter 11

 

It will not happen to Me. Guess What? It will!

 

Money Market Funds – The root of our problems.

 

When the money market funds started in the 1970’s they were greeted with great joy. One did not have to wait for a whole quarter to get interest.  This was a neat deal. One could earn their monies on a daily basis, with no commissions either.

Brokerage firms loved them because they were able to keep all their customer funds in one firm.

All the funds sold for $1.00 there were some minimums, but when a large institution decided to withdraw their funds at one time everyone held their breath. The Partners of the firm put up the cash and the fund “never broke a buck”- until Lehman Brothers in 2008.

There was euphoria everywhere except at your local savings bank. Depositors were rushing to withdraw their monies from the banks to the new modern investment. This spelled the death knell for the savings bank industry.

The repercussions would be felt for decades to come. The savings banks were tightly regulated by archaic laws, which were passed thirty years before “for the common good”. The savings bank lobby was not as strong as the brokers’ lobby. Particularly, the congress did not think long term.

As the Savings Bank Industry started to fade, the government stepped forward with their socialist program of Fannie and Freddie Mae. So our local banks would file the paperwork to the government standards and dump it on the Washington GSE’s (GSE stands for Government Secured Enterprises- Implying they were protected by the US Government.)

As time went by, officers decided to go public and then they decided to issue stock options to themselves. Mind you, this is a government enterprise. The greed factor was working overtime at Fannie and Freddie Mae.

That was just one problem with the money market funds. In theory they would go out every day and buy 90-day commercial paper. 90 days from now that debt instrument would become due and would be rolled over so the funds were always liquid.

Here is the problem; there are more money market funds today than there is sand on a beach.  So now everyone started buying any kind of short-term paper (debt). Consequently everyone started lending short and not long term. Banks would issue short-term debt (remember banks were supposed to be solvent and not borrow.) Governments would buy the debt to shore up the banks and then they would turn around and offer it to the money market funds.

Money market funds were delighted with the high rates and their high ratings.  What could go wrong with a country? Everyone would have to back up the credit. Right? Wrong!

So here is the bottom line as I see it. Banks, world wide, saw easy money in selling their debt to the money market funds. As the situation became dire, different governments bought their debt in order to prop up their banks. They found it easier to resell the debt to the money market funds since these funds were clamoring for quality.

Now everyone was borrowing short, and the figures did not warrant long term lending despite the US Federal Reserve’s Operation Twist.  That was an attempt to buy long-term bonds (20 to 30 year maturity).

So now we face a major test of the socialist state. When a nation announces a huge debt deal to liquefy their country and we wake up in the morning to discover no one bid on the bonds. Not even a throw away bid that could be thrown out as too high.

The possible solution is to bring back the usury laws and while those laws are in the process of being enacted worldwide, forgive interest payments.

If you had lent your neighbor money and he was in dire straits; wouldn’t you be delighted to receive your principal back? This would cut the enormous salaries that today’s bankers are making at our expense.

“Too big to fail?” If that is the case break them up. Socialism is when you are at the counter and the counterman tells the fellow ahead of you to order anything he likes because the guy behind you is going to pay.  Or when NASA stopped the space shuttle and within two months a Dragon Spacecraft from California Exploration Technologies Corp, a private corporation, successfully docks at the International Space Station with supplies. That is American know how can-do spirit! Only the governments of Japan, China and Russia along with the United States have put vehicles into outer space. This is the first corporation using government seed money to get started. We now have a new private industry. Let us hope that the Congress enacts legislature that will encourage investment, but protect and encourage true investments and review the statues every nine years to insure honest competition. Our corporations can compete with foreign governments because we are free and not a bureaucracy. Our Congress should set the rules and then hire the “umpires” to enforce them. Just like pro sports. You hit the referee – you are banned for life!

When an industry like the money market funds have overstepped the boundaries of common sense the government must step in and run some and close some. When an industry fails at self-regulation it is time for our representatives to step in to protect public funds. We must limit funds to only quality and fee structure in competition for the common good for the general public. We as a country tend to overdo a good deal and in the long run bastardize it for all. When it comes to the almighty dollar greed will triumph over common sense unless we restrict their numbers.

There are too many market funds and not enough savings banks. We should simplify laws that will solve these problems without the aid of lobbyists. When tested in the court of law we will find out who passes muster.

These solutions might seem too drastic, but our backs are at the wall.  Soon we will not have a choice.