Eliminating true banks to feed sham banks

September 6th, 2012

frankel-2010The following opinion piece was written by securities law professor Tamar Frankel. Her latest book is The Ponzi Scheme Puzzle: A History and Analysis of Con Artists and Victims.

What is the meaning of the fierce disagreement over the money-market funds regulation that has intensified lately? It seems that banks and bank regulators are hollering to eliminate the money-market funds holding trillions of dollars. If the funds’ structure is changed the way they seek, the special use of money-market funds will disappear.

So what are we really talking about?

Money-market funds are institutions in which corporate businesses and individual investors can park money for a very short time and receive some return. These funds, however, are not covered by governance guarantees.

These funds have two main features. First, they serve as short-term lenders to businesses. Second, they intermediate between businesses and other short-term businesses and individuals. They may not trade exclusively in the money they hold. Their own structure and the law induce them to borrow short-term and lend to businesses short-term.

Money-market funds, therefore, are classic banks. They do what banks should be doing.

What would banks do with the three trillion dollars of the money-market funds? First, they may or may not pay those who put their money in their bank accounts. Second, they may trade in securities to produce profits for their shareholders and their managements. If more money is poured into banks, there is no guarantee they will make the loans that America is starving for.

If, however, bank regulators could prohibit banks any trading to raise their share prices, and make doubly sure that the depositors receive some low payments and that banks will start lending to the business borrowers, then and only then should the money-market funds be valued in a way as to eliminate their main service to the country.

Please note that, unlike banks, money-market funds are limited to the right kind of lending that America needs. So the fight to eliminate the use of money-market funds is the fight to blow away the last institution that performs in a way close to true banking from our system. It is a proposal to have the markets do it.

If we believe that markets have done so well for America, and helped our economy so much, then why not feed them some more? If we really believe that secondary markets help productive users, by all means let’s pour our savings into trading.

But if we don’t believe that secondary markets enable and help productive Americans to produce, then let’s hang on to money-market funds until the banks of this country cease trading and return to lending properly. Having usurped their function, let’s not feed them more to continue to do the same.

Contact Frankel at 617-353-3773; tfrankel@bu.edu

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