Investors Park Cash In Money Market Funds

Investors are moving their money into safe places fast. Demand for Treasury securities is high and gold prices are shooting up. Many people with funds in money markets are wondering whether they are still safe. Financial experts say they are.

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And I'm Renee Montagne. It was supposed to calm the markets, the government's bailout of the giant insurance company AIG. It didn't. In fact, rumors were circulating on Wall Street yesterday about which other companies were in trouble. And there was record demand for U.S. Treasuries as investors sought safe places to put their money. We're going to take a look now at another traditional safe haven, money market funds. Had AIG been allowed to fail, some of them could have been hurt. But economists are telling investors, don't panic, these funds are still quite safe and actually very important to the economy. NPR's Chris Arnold reports.

CHRIS ARNOLD: When you hear about $85 billion loans and the colossal scale of the crisis on Wall Street, it's easy to feel like all this is playing out in a world of people who can write checks with a lot of zeros on them. But if you're like many people and you've stashed 500 bucks, a couple of grand, or more in a money market fund, you're actually playing a crucial role in the world credit markets.

MARK ZANDI: The money market mutual fund industry is huge. It totals $3.4 trillion according to the Federal Reserve.

ARNOLD: Mark Zandi heads up Moody's Economy.com. He explains that that massive pile of money is very functional in the economy. That's because it's put into lots of short-term investments, which means basically some of it is always being loaned out to lots of different companies.

ZANDI: It's a way for big businesses that are very profitable and creditworthy to raise a lot of money very cheaply in a short period of time.

ARNOLD: That helps the economy keep chugging along. And in return, people who put their cash into these funds get a better interest rate then they'd get in a savings account. But the interest rate isn't that good because there's not supposed to be any real risk. Jeremy Siegel is a professor of finance at the Wharton School.

JEREMY SIEGEL: These things have an incredibly good track record of being safe. They invest in extraordinarily safe CDs of banks, and commercial paper, and Treasuries.

ARNOLD: But when Lehman Brothers failed, one money market fund had enough exposure to Lehman that it took a hit and showed a slightly negative return. That hardly ever happens. And the worry was that if AIG failed, that might happen to some more funds.

SIEGEL: Oh, yeah. AIG was a much bigger thing than Lehman.

ARNOLD: And Siegel says the last thing the economy needs right now is for a bunch of money market funds to dip into the red, because that might freak people out and drive them to pull their cash out of the funds.

SIEGEL: I have a lot of money in a money fund. I am not doing anything with it. I am keeping it there. I have great confidence in it, and all my colleagues that I talked to here in finance have tremendous confidence. They are safe, but we are all aware of the fact that, you know, fear can spread irrationally and cause everyone to try to cash in their deposits.

ARNOLD: Taking a lot of that useful short-term money out of the system could really squeeze the banking sector. Mark Zandi says it's easy to paint some nightmare scenarios here, lots of bank failures, the whole economy seizing up, Great Depression type stuff. But he really doesn't think that's going to happen.

ZANDI: But this is the concern. This is sort of the thinking that, you know, we don't want to even take this chance or risk, and that's why we, the Fed, we, the Treasury, are going to step in and make sure that this does not happen. In fact, by doing so, it won't happen.

ARNOLD: Zandi says the Fed and the Treasury these days just won't let the economy melt down.

MAC HISEY: And that's the difference between now and then. I mean, then we didn't have a mechanism to step in like we do today. We have institutions. We have a framework for providing help to the system so that it doesn't implode in on itself. And so I would caution people not to react emotionally to the short-term swings.

ARNOLD: And that's Mac Hisey, President of AARP Financial. He says a lot of people get nervous in a market like this. But if you spread out your retirement accounts into stocks and bonds and, yes, money market funds, he says you want to hang in there and not panic, even if the human impulse is to cut and run.

HISEY: Investors can actually be their own worst enemy at times.

ARNOLD: So far there are no signs that money market funds are in any trouble. And with the AIG takeover, the government is sending a signal that it will intervene to protect the essential parts of the credit system. Chris Arnold, NPR News.

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