Booms, Busts, and Recoveries Message Board

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Strategies & Market Trends : Booms, Busts, and Recoveries

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To: TobagoJack who wrote (35302)	6/23/2003 6:56:52 AM
From: TobagoJack	Read Replies (2) of 74559

Hi Jay, you got this e-mail from one at the lunch: Given our conversation at lunch today, I thought this an interesting take from Daniel Gross at Slate.com So far this year, as returns have drifted toward zero, investors have yanked about $125 billion out of money-market funds, or about 5 percent of total assets. Will the withdrawals accelerate if interest rates and money-market fund returns fall further? No panic is imminent. It takes a few months for rate cuts to filter into money-market accounts. And the large institutions that sweep unused cash into money-market funds don't have many appealing alternatives. But if the economy doesn't respond to the Fed's medicine quickly, and if rates stay where they are for several quarters, we'll be in uncharted territory. Faced with the prospect of either eating expenses or reporting negative returns taking more from clients in fees than they earn in interest from money-market funds may choose simply to return investors' money and close up shop. Or they may seek to goose returns by taking on more risks by using derivatives in an effort that frequently ends in tears. Or companies, governments, and wealthy individuals may again resume parking cash in banks. And that could spell trouble for the $1.3 trillion commercial paper market. Peter Crane suggests that money funds buy 40 percent of all the commercial paper issued. Commercial paper essentially an IOU is the easiest and most hassle-free way for large companies to obtain short-term credit. But if the money that overwhelmingly funded commercial paper moved to bank accounts from money-market funds, companies would be forced to turn to banks for short-term debt. Bank credit is generally more expensive and filled with more hassles than commercial paper. What a blow it would be to the Fed if reducing interest rates to 45-year lows winds up increasing borrowing costs for businesses it's supposed to benefit.

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