The edge of the knife

Money market funds, an increasingly popular place to park cash, will
need to raise fees or close to new money to remain profitable as yields
hover at near-zero, according to industry managers…

Jim McDonald, who runs taxable money market funds for T Rowe Price,
said: “You can’t make money in this situation. If short-term interest
rates stay where they are, it’s virtually impossible to run a
government [bond] fund and make any money. You can close the fund,
that’s one option.”

Vanguard last week closed two of its money market funds to institutional investors, while Credit Suisse said it would quit managing money market funds in the US and liquidate $8bn in assets across its three funds.

Here is more.  Here is my earlier post on the Tsiang equilibrium.  That’s, sadly, my mantra for the coming year: the Tsiang equilibrium.  Some call it the liquidity trap, but in fact they have different microfoundations and different solutions.  The Tsiang equilibrium is in principle easy enough to spring out of, at least if the government stops guaranteeing everything, but no one knows how to get from here to there.

Comments

Guarantee stuff until the banks deleverage, and eliminate cap gains and business taxes to get it going again.

Perhaps the problem solves itself. The US government will have huge funding requirements in 2009, and money market funds are big buyers of government bonds. If they step aside, how long can rates remain near zero?

Vanguard as been nudging me to buy cd's and other instruments through their brokerage services

If the government were to announce nothing was insured anymore and it was considering a first strike on Russia and China, that would do the trick and there would be a run on inventories.

The question is what specifially you want to exit T-Bills towards, then the question of how. If you are just reinflating housing and commodities, and enacting unsustainable borrowing to make really rich people richer, what's the point?

I don't see how this is a big problem. If they just buy Fannie or Freddie debt they will get plenty of return. High quality CP should give even more yield.

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