Uh-oh

According to a recent report by Fitch, as of February, 44.3 percent of prime money market funds in the United States were invested in the short-term debt of European banks.

There is more detail here; fortunately, not all of them have heavy exposure to Greece.  You will recall also that “runs on money market funds” were one problem which regulators have yet to address in a satisfactory manner.  Here is another claim, with an uncertain degree of verification:

It will be American banks and insurance companies that will have to make the lion’s share of default insurance payments to European institutions if Greece fails…if one includes credit default exposure, American exposure to Greece increases from $7.3 billion to $41.4 billion.

It still remains the case that without contagion effects these losses can be handled.

Comments

Not to worry.

Markets contain all the information.

If that were true, why would you not worry? Reality is Bayesian (i.e. probability-driven).

Cliff,

We have Alfred E. Newman financial service businesses who lobby 1) to be exempted from stricter oversight by arguing they are not too big to fail, 2) who argue that we do not need to regulate CDS and derivatives because businesses will choose their counterparty carefully. We have those who argue strict EHM.

So, why worry, as Alfred E. Nueman would say. The market contains all the information and there is no need for oversight, or even reporting by Fitch. They are big boys who know what they are doing. Stay cool.

There is no free market in the banking industry.

Indeed you shouldn't worry, Bill. Your On-Duty Fraudulent Clown is working full-time to protect you from yourself and from everyone else. The price? Well over that of a German shepherd. Can you afford it? Hope so, otherwise apply for an exemption as "Fraudulent Clown's servant" (he pays well over the minimum wage --as much as Eliot Spitzer's tip to his call girls-- but he demands 24/7 availability).

E.
Regulations are tied up in court, so don't count on much oversight.
We move slowly in the US

Please don't tell me that you're blaming Clarence and Antonin for your problems. Trust me: Watch out for the clowns!

E.

I'm just reporting the facts. The regulations haven't been appealed yet, so there is plenty of time for your friend Antonin to speak.
What is interesting though is the belief that just because a law is passed, it goes into effect immediately.
So, if you are concerned that the person you claim is a clown is now not watching, you still might not worry because, as we know from past experience, there is no such thing as a financial crisis. Everything can be cleaned up with more tax cuts.

Regulations are implemented and monitored by agencies with different powers as delegated by law-makers and with different degrees of dependence on the president. Over-a-thousand page laws that intend to regulate private activities are difficult to implement because the clowns often don't know what they are doing --it doesn't matter that many are lawyers because first they are clowns (and often bad lawyers, the main reason to change their profession--any doubt, ask Joe). As clown Nancy said at the time of voting for one of those laws, only upon implementation the clowns will know the sort of beast they have created and they will say to all Americans: surprise! Of course, during the process of approving and implementing the law, a parade of pundits and intellectuals celebrate the clowns, whereas prospective losers bribe the clowns to get waivers exempting them from the new legal obligations. And finally we read in the news that unexpectedly the recovery will take much longer than projected by the Harvard's Dream Team. It's a great show, Charlie Brown!

E. You write a lot without saying anything. The regulations are being blocked. Maybe I should post the WSJ story on this for you.

Even if markets did contain all available information, there would still be reason to worry. Even if there was strict regulation, there would be reason to worry. I really don't get the connection here between worrying and EMH and regulation. Are you trying to say this proves that EMH is not true and therefore there should be stronger regulation of something?

Bill is just mocking at the idea of markets being efficient. He believes that any suspicion of market failure is enough to justify government intervention and that this intervention is usually effective (government fails only when bad people that hate others are elected; he calls this bad people "Republicans"). Don't waste time trying to argue seriously with him, just make fun of him by pointing at what is going on in DC.

About DC. Just after writing my previous comment I read this letter sent to by DB to a DC radio station:

In today’s 3pm hour you reported on the “pilgrimage” (your reporter’s word) that many Americans make every summer to DC “to witness democracy in action first hand.”

Your reporter’s reverential tone implies that tourists to DC behold here something hallowed. I disagree. Too much of what tourists to DC witness first hand is theater – marble and monuments meant to mobilize the spirit; buildings and boulevards built to bedazzle; ceremonies and celebrations suggesting the sacred. But behind it all are venal politicians grasping for more power and hoping that the stage-props scattered about DC will dupe ordinary people to buy into the ridiculous notion that government officials are saints whose genius is matched only by their grand goodwill.

In fact it’s mostly fraudulent – the gaudy ornaments of the power-hungry hungrily and cynically enchanting their victims with the illusion of earthly salvation by flesh-and-blood saints. As dramatist David Mamet writes in his new book The Secret Knowledge, “Having spent my life in the theatre, I knew that people could be formed into an audience, that is, a group which surrenders for two hours, part of its rationality, in order to enjoy an illusion. As I began reading and thinking about politics I saw, to my horror, how easily people could also assemble themselves into a mob, which would either attract or be called into being by those who profited from the surrender of reason and liberty – and these people are called politicians.”*

DC is a stage on which the greedy fool credulous audiences into self-destructive subservience.

Sincerely,
Donald J. Boudreaux

Cliff, E. is write that I am mocking EMH, and he is wrong in saying that the regulations that should protect you have been implemented. The "what's going on in DC" is heavy litigation on the rules trying to prevent their implementation.

Meh. They'll be fine. They own the most important financial asset money can buy - both parties.

First, assume that you have a can opener.

Why would you ever think there would be no contagion effects?

"these losses can be handled": or 'contained' as people used to say.

The accepted phrasing is "Well contained."

This would all be worth it if, in exchange, we were to receive feta and olives free until the end of time.

Well, at least we know US Treasuries are totally safe.

"German Rating Agency Feri Downgrades US Government Bonds: AAA to AA"

Oops.

Buy gold now while your fiat still can. . .

These remarks by President Obama during Merkel's visit did not get the attention they deserve: “We think that America’s economic growth depends on a sensible resolution of this issue. We think it would be disastrous for us to see an uncontrolled spiral and default in Europe, because that could trigger a whole range of other events,” Obama said. It's hard to see how Treasury could bail out Greece, but we know that the Fed shoveled plenty of money to European banks during the last crisis.

Doesn't this imply that the Fed is therefore providing financial support for the European banking sector (the FDIC insures our money market funds, thereby reducing incentives to care about the financial health of their loans to European banks), which might be a fairly positive thing?

I don't understand why money market rates are so low (like .07 percent with Fidelity) - I get why they should be low, but why so much lower than a bank - is it that the MM fund provider eats up all the return (in expenses and profit), or is it that there's so much money floating around (beyond what individuals can easily structure to get bank rates and FDIC insurance) that you truly can't do anything that would get even .5% with some room for expenses/profit for the fund? I mean, who's taking exposure to Greece in exchange for such low rates?

Rusty, During periods of severe recession, people retreat to safe assets, such as US government debt. There is a shortage of safe assets so the price of safe assets get bid up, meaning their interest rates decline.

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