During the wave of banking regulation that followed the Great Depression, the government slapped heavy controls on the interest rates that banks could offer. They weren't very good, which made the banks sounder, and consumers worse off. When inflation and interest rates rose in the late sixties, this became a big problem. Then some clever chap came up with the money market fund. Legally it worked like an investment fund, not a bank account: you invested in shares, with each share priced at a dollar. The fund invested in the commercial paper market and committed to keep each share worth exactly one dollar; whatever investment return they got was paid out as interest on your shares. This gave you something that looked a lot like a bank account, without all the legal tsuris.
But according to Landon Thomas, Jr.'s reporting for the New York Times (hat tip Tyler Cowen), there's a threat of this happening again. This time not with the failure of an investment bank, but with a failure of Greece to pay its debts. Apparently "as of February, 44.3 percent of prime money market funds in the United States were invested in the short-term debt of European banks" including "French banks like Société Générale, Crédit Agricole and BNP Paribas" with significant exposure to Greek debt.
This time around, though, there may be a problem. As Brian Beutler explained last July, the Dodd-Frank Wall Street regulatory overhaul deprives Treasury of the legal authority that was used to backstop money market funds at the time. When Treasury officials were asked about this at a meeting with bloggers several months ago, they gestured in the direction of the idea that their resolution authority tools would help avoid a replay of the whole scenario. But Dodd-Frank obviously doesn't give the Treasury Department the authority to engage in an orderly liquidation of Greece. That means, as best as I can tell, that we're left to hope the folks running the European Union know what they're doing even though very little in their recent performance bolsters that hope.
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