Friday, June 15, 2012

Bank Runs: To Save MMM Funds, Scrap Them

KPC Pal Amar Bhide has an interesting piece in Bloomberg.

In an email, Amar asks:   The just published piece implicitly offers another route to universal -- and explicit -- deposit guarantees.  My European friends: Might a similar "ECB Direct" accounts be the answer to bank runs in Spain etc?


John Thacker said...

I don't understand the call for "a more user friendly version of Treasury Direct." How is this different from existing "US Treasury only" MMM funds (or Short-Term Treasury mutual funds)?

Yes, as he points out, plenty of MMM Funds went into commercial paper in an effort to chase yield. But the biggest reason there is that the really short term Treasuries (a year and under) are yielding basically nothing, making it difficult to beat even the low fund costs at Vanguard. (Which is why even Vanguard has their Treasury-only MMM funds closed; you can of course still invest in short term Treasury funds that also invest in 2, 3, maybe 5 year bonds.)

Forget short term Treasuries, investors would be better off getting the interest money that the Fed pays on bank reserves.

Now, it is true that inflation is really low. But the real yield is still negative (especially after taxes), and people have stickiness where they don't like negative returns on bonds that you might get in deflation or near deflation.

Seems like you've made a good argument for Scott Sumner's approach.

John Thacker said...

The MMM Fund problem is a real zero lower bound problem. Who possibly would want to invest cash in a deflationary environment, when they could do better just holding currency.

To save MMM Funds, increase inflation. That's all. The funds went bust when NGDP plunged in late 2008.