This is a severe hit to the mind of Joe Sixpack. “But banks aren’t supposed to lose money. I mean, not deposits, right???”
When people start to realize they may not get back all of their “100% safe” money out of their money market accounts, this could create a bank panic and a run.
Very scary stuff. It is a small loss. 3% is nothing. But it is the type of loss that causes panic and bank runs. Joe Sixpack is going to need a lot of reprogramming not to pull his money out of the bank and put it home in the mattress.
I agree, this is a very distressing development and I’ve been waiting for a long time for one of the money market funds to fail to return principal. This must be watched closely. If people pull their money out of banks, we collapse. End game. End of story. Good-bye economy. Hello Great Depression II.
“Hello Great Depression II.”
Maybe we’ll get it right this time and use the depression as a means of reinstalling the free market.
But we won’t. If we have another massive bank run and industrial collapse, the socialists will blame capitalism instead of themselves.
I think the bank panic is going on very silently as people and companies who had more than $100,000 at one single bank have or will be moving around money so that they do not have more than $100,000 in any one bank (and thus preserving FDIC insurance)
The story tonight about the money market funds is a bigger one, since Joe Sixpack has always thought the money market fund at his broker was also 100% safe, even though it was never FDIC insured. This may counter-act bank runs because I think guys will pull their money market fund monies and move them to 100% FDIC insured bank accounts as long as they don’t put more than $100,000 in any one bank.
But remember that the money market assets have historically been used to get low cost money to top tier AAA type corporations. That will raise the cost of borrowing for those companies if the money market industry either contracts or is forced to really increase yields.
IMHO this money market story is the big story of the night that is getting lost in the AIG situation. It will make some people consider stuffing money and gold in the mattress.