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The edge of the knife
Money market funds, an increasingly popular place to park cash, will need to raise fees or close to new money to remain profitable as yields hover at near-zero, according to industry managers...
Jim McDonald, who runs taxable money market funds for T Rowe Price, said: “You can’t make money in this situation. If short-term interest rates stay where they are, it’s virtually impossible to run a government [bond] fund and make any money. You can close the fund, that’s one option.”
Vanguard last week closed two of its money market funds to institutional investors, while Credit Suisse said it would quit managing money market funds in the US and liquidate $8bn in assets across its three funds.
Here is more. Here is my earlier post on the Tsiang equilibrium. That's, sadly, my mantra for the coming year: the Tsiang equilibrium. Some call it the liquidity trap, but in fact they have different microfoundations and different solutions. The Tsiang equilibrium is in principle easy enough to spring out of, at least if the government stops guaranteeing everything, but no one knows how to get from here to there.
Posted by Tyler Cowen on December 23, 2008 at 07:40 AM in Economics | Permalink
Comments
Guarantee stuff until the banks deleverage, and eliminate cap gains and business taxes to get it going again.
Posted by: rhhardin at Dec 23, 2008 8:41:39 AM
Perhaps the problem solves itself. The US government will have huge funding requirements in 2009, and money market funds are big buyers of government bonds. If they step aside, how long can rates remain near zero?
Posted by: at Dec 23, 2008 10:34:26 AM
Perhaps the problem solves itself. The US government will have huge funding requirements in 2009, and money market funds are big buyers of government bonds. If they step aside, how long can rates remain near zero?
Posted by: at Dec 23, 2008 10:40:20 AM
Can someone explain why Tsiang's postulated conditions have an equilibrium of government ownership of all capital?
Posted by: mk at Dec 23, 2008 8:18:14 PM
Vanguard as been nudging me to buy cd's and other instruments through their brokerage services
Posted by: at Dec 23, 2008 9:16:27 PM
Vanguard as been nudging me to buy cd's and other instruments through their brokerage services
Posted by: at Dec 23, 2008 9:18:08 PM
If the government were to announce nothing was insured anymore and it was considering a first strike on Russia and China, that would do the trick and there would be a run on inventories.
The question is what specifially you want to exit T-Bills towards, then the question of how. If you are just reinflating housing and commodities, and enacting unsustainable borrowing to make really rich people richer, what's the point?
Posted by: Phillip Huggan at Dec 24, 2008 1:51:53 AM
"If the government were to announce nothing was insured anymore and it was considering a first strike on Russia and China, that would do the trick and there would be a run on inventories."but it is impossbile
Posted by: sugar grinder at Dec 24, 2008 4:10:57 AM
I don't see how this is a big problem. If they just buy Fannie or Freddie debt they will get plenty of return. High quality CP should give even more yield.
Posted by: Kyle at Dec 26, 2008 7:50:41 AM
A Specific Application of Employment, Interest and Money
Plea for an Adventure in a New World Economic Order
Adam Smith, Karl Marx, John Maynard Keynes and Alan Greenspan: a Unified Perspective
Abstract:
This tract makes a critical analysis of credit based, free market economy, Capitalism, and proves that its dysfunctions are the result of the existence of credit.
It shows that income / wealth disparity, cause and consequence of credit, is the first order hidden variable, possibly the only one, of economic development.
It solves most of the puzzles of macro economy: among which Business Cycles, Stagflation, Greenspan Conundrum and Keynes' Liquidity Trap...
It shows that Adam Smith, John Maynard Keynes, Karl Marx and Alan Greenspan don't contradict each other but that they each bring a meaningful contribution to a same framework for understanding macro economy.
It proposes a credit free, free market economy as a solution that would correct all of those dysfunctions.
In This Age of Turbulence People Want an Exit Strategy out of Credit, an Adventure in a New World Economic Order.
Posted by: Adam Smith at Dec 30, 2008 11:45:19 AM
