Tuesday, October 21, 2008

The Debts of the Spenders: FED Issues De Facto Money Market Fund Guarantee

Bernanke's latest scheme to support the credit markets will blow up in his face... again. His plan is to pump more than 1/2 $Trillion into money market funds. Money market funds are buyers of short term commercial paper. They fulfill a critical economic role by ensuring liquidity in short term financing to all aspects of business whether it small, medium, or large.

Sure, he will bring down the TED and OIS-LIBOR spread by flooding the system with even more liquidity.

The unintended consequence? A flight out of equity to money market funds by baby boomers. Once retirees see that money market funds - NOT ACCOUNTS (which are FDIC insured) - are now de facto guaranteed, they will dump their mutual fund stocks in favor of money markets.

http://biz.yahoo.com/ap/081021/fed_credit_crunch.ht

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