The panic and money-market funds

White House/Pete Souza

President Barack Obama meets with heads of financial regulatory agencies in the Roosevelt Room of the White House to receive an update on implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, July 18, 2011.

Article Highlights

  • To believe that the taxpayers are standing behind money-market funds is to endorse the underlying theory of Dodd-Frank.

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  • The supposed instability of unregulated markets is the left's basis for regulating financial markets.

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  • “In the absence of a financial panic, I believe that unregulated markets are generally stable.” –Peter J. Wallison

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Although I agree with the commenters (Letters, June 14) who upbraid the Journal for its position on money-market fund regulation, there's a bigger issue involved. Whatever happened to the Journal's confidence that unregulated markets are stable? To believe that the taxpayers are standing behind money-market funds is to endorse the underlying theory of the Dodd-Frank Act. The supposed instability of unregulated markets is the left's basis for regulating financial markets, including money-market funds.

The crisis was an investor panic in which one of the results—in addition to several failures among heavily regulated banks and rescues of lightly regulated investment banks—was that a money-market fund broke the buck. In the panic, many investors redeemed their shares in similar funds.

Without minimizing the seriousness of the crisis, it is necessary to recognize the importance of the panic. In the one previous case of breaking the buck there were no significant withdrawals from other funds, just as the failure of Drexel Burnham (the fourth largest investment bank) in 1990 did not trigger a run on others—although in the anxious times of 2008, Lehman's failure did. That there have been other instances in which fund sponsors supported their funds proves nothing; we do not know whether runs on other funds would have occurred in those cases. My bet is no. In the absence of a financial panic, I believe that unregulated markets are generally stable. This was the first panic in 80 years and maybe since 1907. Money-market funds are a successful $3 trillion business. One instance of instability in a financial panic is not a reason to wreck the business model.

Peter J. Wallison is the Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute. He was a general counsel of the U.S. Treasury Department and served as White House counsel to President Ronald Reagan.

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