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November 2, 2017

New SEC Money Market Rule Predictably Rigged the Game for Government

 
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Money market funds are incredibly safe places to park money. People and businesses use money market funds to provide safety and liquidity for their cash, and to obtain at least some small yield. Treasuries are at least as safe, but not as liquid. Money market funds also tend to pay slightly higher yields than Treasuries, which makes Treasuries somewhat less attractive by comparison to prime money market funds, which invest in corporate and municipal debt.

But this presents a problem to the federal government, because with federal debt continuing to grow, the feds need investors to keep purchasing that debt. And while the federal government has little power over foreign investors, it certainly has the capacity to “nudge” the choices of U.S. citizens by manipulating policy.

Last October, a new Securities and Exchange Commission (SEC) rule took effect that placed numerous new restrictions on money market funds that invest in private and municipal debt. Because the new rule placed unwarranted burdens on private money market investments but not on funds that invest exclusively in government debt, this rule had the effect of favoring government debt over private sector debt. And I don’t think it was a coincidence.

I was suspicious of the SEC’s new rule, because I think I’ve detected a pattern: There have been several moves in recent years that seem designed to route investment funds into government debt rather than private debt. Remember the Obama administration’s now-defunct “MyRA” accounts? They could only be invested in Treasuries, which is a terrible place for retirement savings. But MyRA accounts would have been fabulous for the servicing of the federal government’s debt.

Over a year ago I shared these concerns and predicted that, by biasing money market savings toward government debt and away from private debt, the effect of the SEC money market rule would be to transfer capital from the private to the government debt market.

Sure enough, the results are in, and that is exactly what happened. The Treasury Dept.’s most recent Asset Management Report reveals that:

By October 31, 2016, prime and tax-exempt MMMFs experienced a decrease in assets of $1 trillion since the beginning of the year, and government MMMFs saw an increase in assets of $968 billion through the same period.

And by now the impact of the rule is undoubtedly higher. The SEC’s money market rule has facilitated an enormous shift of assets from the private capital markets, which drive economic growth, to the government sector, which doesn’t. It favors federal agencies and GSEs, such as Freddie Mac and the Federal Home Loan Bank, and disfavors Main Street business borrowers, municipalities, and financial institutions.

Whether this rule was intended by the feds to nudge savers into choosing government debt instruments over private debt instruments, or whether this was simply the effect, the SEC’s money market rule is bad policy and should be overturned.

Thankfully, legislation has been introduced to do exactly that. H.R. 2319 would have the effect of undoing the SEC’s harmful money market rule, and the House Financial Services Committee should give it careful consideration.

I was disappointed to learn that Jeb Hensarling will retire from Congress at the end of his current term, but Chairman Hensarling should instinctively understand the dangers of policies that favor government debt over private debt, and I hope before he retires he will ensure that this harmful rule is overturned.

As federal debt continues to skyrocket and become less easily serviced, we should be on guard for various rule and policy changes that just coincidentally have the effect of favoring government debt instruments over private debt instruments. The SEC’s money market has had that effect, if not by design, and should be overturned for its negative impact on the private debt market.




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