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October 6, 2016

Is the SEC's Money-Market Rulemaking Designed to Discriminate Against Private Sector Debt?

 
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In a few weeks we have another policy change coming out of Washington—this time new regulations on money market funds—that seems almost intentionally designed to cause harm to the private sector and to slow economic growth. I’m starting to wonder whether this is simply more Big Government incompetence or something more insidious?

I tend to attribute most failures of government to ineptitude rather than conspiracy. There’s no reason to think the average government employee is any wiser or more knowledgeable than the average person in the private sector—in fact, there’s every reason to believe otherwise, since various federal protections make it harder to weed out incompetent federal employees.

But suppose for a moment that I am wrong—that at the highest levels of the most important federal agencies, there are actually devilishly clever people playing the game several moves ahead of the rest of us. Making moves that are vital to the survival of their most cherished and most useful institution—the federal government—regardless of the impact on the American people.

That scenario might be more probable or less probable, depending on your degree of cynicism, but it hinges on a defensible premise—that the interests of the federal government and the interests of the American people are NOT the same thing. The federal government is not a proxy for the country. As Ronald Reagan said in his first inaugural address, “We are a nation that has a government—not the other way around.” It’s said that the smartest thing the Devil ever did was convince people he didn’t exist. Well, the smartest thing the federal government ever did was convince the American people that its interests are their interests. The truth is, the federal government is the most powerful special interest in America.

So if you’re the federal government, what is your greatest threat? Not war or terrorism, because war and terrorism have proven to be windfalls for federal government growth. Almost certainly the single most important institutional concern of the federal government today is managing its own debt, which has risen to an unimaginable $19.4 trillion dollars. Interest alone on the debt is now one of the largest line items in the federal budget, and so servicing its debt and avoiding insolvency is as important to the federal government as it would be to any business or household.

The only reason the federal government isn’t facing debt insolvency right now is that interest rates are at historic lows. Coincidence? Low interest rates arguably harm the economy in a number of ways, and they certainly harm seniors on fixed incomes. But low interest rates benefit the federal government by keeping the cost of debt service artificially low. That’s at least one reason why it’s no coincidence governments around the world are experimenting with unusually low and even negative interest rates.

But low interest rates present the federal government with another problem: The federal government also needs customers to keep buying its new debt. But low interest rates Treasuries are not as attractive to buyers as corporate or municipal bonds paying somewhat higher interest rates.

So while the feds may not be able to make their low-interest debt more attractive, they have unique powers to make other debt less attractive, which has the same effect. And they are doing exactly that.

And we’ve seen evidence before of the federal government using rules to nudge investment into its own debt instruments.

Remember a few years ago when the Obama administration rolled out its yawner of a new retirement savings vehicle, the MyRA? It had almost no redeeming features, but did you notice that MyRA accounts can only be invested in federal debt instruments? That was just one of several policies enacted by the Obama administration that seem intended to bias decisions and nudge money into the debt of the federal government rather than into corporate or municipal instruments.

[of course, I had a genius idea for the MyRA accounts, but of course the Obama administration didn't share my vision.]

The latest example is a rulemaking by the Securities and Exchange Commission (SEC), scheduled to take effect on October 14th, which places many new restrictions on money market funds that invest in private and municipal debt. The rules are supposedly designed in the wake of the financial meltdown to make money market funds “safer.”

But money market funds are already incredibly safe. People and businesses use money market funds for many of the same reasons they buy Treasuries—safety and liquidity for cash-equivalents that pay at least some amount of yield. Money markets invest in private and municipal debt instruments, which facilitates growth in the private and municipal sector. But money market funds tend to pay a bit more interest than Treasuries, which makes them more attractive.

Well, the SEC’s new rules make money market funds less attractive to savers, and anticipation of the new rules has already caused a quarter of a billion dollars to flow out of such money market funds. This has already made it more expensive for businesses and municipalities to finance growth and expansion.

Where is the money going? Interestingly, into government money-market funds, since, just coincidentally, the new rules do NOT apply to funds that invest in debt issued by the federal government or government-controlled enterprises such as Fannie Mae. Is this another nudge of debt buying from the private sector toward the federal government, in order to benefit the federal government at the expense of the private sector? Sure seems like it.

Conspiracy theorists sometimes claim that the feds are “coming after” your private savings vehicles, like 401ks and IRAs. Maybe. I’m more inclined to think the federal government is actively using any lever at its disposal to nudge money into its own debt and away from its competitors in the corporate and municipal sectors, and the SEC’s money-market rulemaking is only the latest example.

There are serious implications for economic growth if the federal government continues to disadvantage corporate and municipal debt in favor of its own. Raising borrowing costs for the private sector has a direct impact on business’ bottom line and thus on investment and job creation, and cities and school districts are already finding borrowing for schools and other critical infrastructure to be more expensive in anticipation of the new rules. But the feds aren’t likely to care, just as they don’t care about seniors on fixed incomes suffering from low interest rates. Because the federal government is its own special interest, and it looks out for itself. And the sooner the American people figure that out, the better.




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