Tuesday, 14 April 2015
The Fed thinks that bond funds are potentially unstable: investors might want to withdraw from them quicker than the bonds or underlying assets can be sold, other than at fire-sale prices.
Well the solution is to treat bonds the same as money market mutual funds which are being forced to obey the rules of full reserve banking. That is MMMFs which simply lodge investors’ money at the central bank and/or in short term government debt will be allowed to promise to return $X to investors for every $X invested. In contrast, MMMFs which invest in anything else, e.g. corporate bonds, will have to let the value of investors’ stakes in the relevant MMMF float in value.
Given a mass exodus from GM shares, the share price would crash. Everyone knows that, and no one is bothered. If the value of stakes in bond funds crashed given too fast an exodus, then I suggest no one would be bothered. In fact I thought that was already the case with bond funds. But if I'm wrong there, then the solution is to let bond fund stakes float just like GM shares.
Long may this movement in the direction of full reserve continue.