US Government to Control Money Market Fund Redemptions

The US government, via the Securities and Exchange Commission, will impose restrictions on the movements or fund flows in the money markets.

From the Wall Street Journal, (bold mine)

U.S. regulators approved rules intended to prevent a repeat of an investor exodus out of money-market mutual funds during the financial crisis, addressing one of the biggest unresolved issues from the 2008 meltdown.

The asset-management industry, long wary of stricter rules, largely said it could live with the new regulations, which the Securities and Exchange Commission backed in a 3-2 vote.

The rules would require prime money funds catering to large, institutional investors to abandon their fixed $1 share price and float in value like other mutual funds. Prime funds sold to individual investors can keep the $1 share price. The rules also allow all money funds to temporarily block investors from withdrawing cash in times of stress or allow the funds to impose fees for investors to redeem shares…

This is just a noteworthy example of the proclivity of governments to resort to the King Canute effect where in this case has been meant to prevent the outbreak of volatility by fiat. 

As I previously noted King Gnut was said to have commanded “the tides of the sea to go back" just to show to his fawning courtiers the limits of his powers

In reality, such actions are representative of government dealing with the symptoms rather than the disease. 

The 2008 freeze of the money markets which “broke the buck” wasn’t based on merely whims by investors but in response to the US housing bubble bust.  As I wrote in December 2013

In the culmination of the 2008 US mortgage crisis, when Lehman Bros filed for bankruptcy, the US money market seized up when a wave of redemptions prompted for the failure of Reserve Primary fund to maintain her net asset value (NAV) at par or above the US $1 per share. This caused a liquidity crisis known as “breaking the buck” particularly for many non-US banks heavily reliant on US wholesale markets. Unlike typical retail depositor led bank runs, the 2008 “breaking the buck” was a bank run on the shadow banking industry or essentially on wholesale deposits by institutional investors in the face of deteriorating conditions in the market particularly deleveraging and or de-risking

In short, what caused the breaking the buck of 2008 had been the boom-bust cycle. In particular, financial ‘subprime’ assets that pillared the boom turned out to be toxic instruments when the bust emerged. 

And the ensuing stampede or exodus by money market funds had been in the realization that the assets backing money market funds had been contaminated. So intervening in the money market will hardly prevent another market volatility because they don’t deal with the roots--the boom bust cycle.

And now that we are seeing “all time high to record first half to unmatched highs” accretion of risky credit instruments backing today’s record stock markets and record low volatility, such essentially reflects on the same fundamental dynamics that triggered the 2008's “breaking the buck”. 

So money market interventions are likely to create more unintended consequence

Even a branch of the US Federal Reserve have warned of money market interventions

As Robert Wenzel of the Economic Policy Journal explains and warns

The New York Federal Reserve Bank in April warned in a paper of the consequences of such a rule:

[T]he possibility of suspending convertibility, including the imposition of gates or fees for redemptions, can create runs that  would not otherwise occur... Rules that provide intermediaries, such as MMFs, the ability to restrict redemptions when liquidity falls short may threaten financial stability by setting up the possibility of preemptive runs...one notable concern, given the similarity of MMF portfolios, is that a preemptive run on one fund might cause investors in other funds to reassess whether risks in their funds...

Got that? The Fed recognizes the possibility of preemptive runs that could spread throughout the money market sector because of these new rules.

Bottom line: The risk of holding funds in a money market fund just increased exponentially. Your money will be much more liquid in an elitist, establishment bank account.

Get your money out of money market funds now!

Yet by imposing such controls has the US government been expecting something cataclysmic in the offing?