Tuesday, 5 August 2014
The US moves towards full reserve banking.
Money market funds in the US which invest in anything more risky than short term government debt are being forced to abandon their promise to those depositing money with them that depositors will get $X back for every $X deposited. See 4th paragraph of article by Marshall Auerback entitled “Another Blow To The Deficit Fetishists”. That amounts to imposing the rules of full reserve on MMFs.
Under full reserve, any bank or lending entity that invests in anything the least bit risky (like mortgages or loans to businesses) cannot promise depositors they’ll get $X back for every $X they deposit. Instead, those funding such lenders invest in shares or stakes in the bank which are effectively shares. Hence their money is not entirely safe.
As to those who want total safety, they place their money with entities or in accounts where sums deposited are simply lodged at the central bank or perhaps invested in short term government debt. And that’s what MMFs who want to make the above promise will have to do.
However BANKS in the US can continue to promise depositors they’ll get $X back for every $X deposited, while lending on that money to mortgagors and business. Thus as far as I can see we have one set of rules for banks and a more restrictive set of rules for MMFs. That situation has “Laurel and Hardy” written all over it, unless I’ve missed something.