Money Markets Thaw
SCOTT SIMON, host:
This is Weekend Edition from NPR News. I'm Scott Simon. Coming up, reading, writing, and farming. But first, overall the outlook for the economy is bleak, but there's actually been some quiet improvement in one corner of finance. That's money market funds. Trillions of dollars in investments flow through those funds. But as the financial crisis mounted, that flow was frozen by fear and uncertainty. Now there may be signs of a thaw. NPR's Chris Arnold reports.
CHRIS ARNOLD: Money is like the tap water of the economy. Normally big companies and banks just open the faucet, and they can borrow all they need. Lately they've been getting a trickle or none at all, but that's starting to change.
Mr. JOE TULLY (Managing Director, Money Markets Team, Prudential Fixed Income Management): We're definitely healing. We're definitely getting better. Money is starting to flow out to term.
ARNOLD: Joe Tully is the top manager of money market funds at Prudential. Normally banks and corporations can borrow for one, two, or three-month terms at low rates from funds like Tully's. They use that money to meet payroll, build offices, all kinds of stuff. But as the credit crisis got worse, money market funds got so nervous they would only make those loans for 24 hours. Think about that. Tully says, what if that happened to you?
Mr. TULLY: So let's say you had all your credit card debt, and the bank threatened you that you had to pay it down to zero every single day, or you had to negotiate with them not to have to pay it down to zero every single day. That would certainly change or moderate your behavior. You'd certainly spend less on your credit card. It also would probably cancel your vacation plans.
ARNOLD: That right there is what's been happening to all kinds of companies around the country and the world. They've had to cut way back. Equipment's not getting purchased. Companies are less likely to hire workers. And that's why it's such a big deal that things are finally looking a little better here. David Glocke runs Vanguard's Prime Money Market Fund managing a hundred billion dollars.
Mr. DAVID GLOCKE (Portfolio Manager, Prime Money Market Fund, Vanguard Fixed Income Group): I feel far more confident about where we're going, but it's still a bumpy road ahead.
ARNOLD: Glocke says over the past couple of weeks, the government's done a lot. It made direct equity injections to prop up the nation's banks. Then this past Monday, the government promised basically to help the money funds to raise cash if they needed it. That's encouraged them to loan out more money for longer periods of time.
Mr. GLOCKE: Over the course of the week, I've sold about $10 billion in Treasury securities and re-invested about eight billion of that into commercial paper and bank CDs.
ARNOLD: In other words, Glocke is pulling a lot of money off the sidelines and getting it flowing back to banks and companies that need it. Other big money managers are getting more confident too. Deborah Cunningham runs some large money funds at Federated Investors.
Ms. DEBORAH CUNNINGHAM (Senior Vice President & Chief Investment Officer, Federated Investors): We are looking much more normal. Our resumption to sort of normal trading paths is well on its way.
ARNOLD: Still, it's definitely not all the way there yet. And those money funds are just one big source of cash in the economy. Another crucial one is the traditional banking system. And even after the government injected $125 billion into the major US Banks, there's concern that most have just been sitting on that cash rather than making loans.
Dr. RICHARD MARSTON (Professor of Finance and Economics, Wharton School, University of Pennsylvania): And that's what's going to make the recession more serious.
ARNOLD: Richard Marston is a finance professor at the Wharton School. He says the banks are still pretty beat up here.
Dr. MARSTON: The losses have been so massive that, you know, this is just unprecedented to have the banks entering the recessionary period being so impaired. And what the treasury has basically done is try to restore their capital positions, but even that - it is not clear that they have injected enough capital to restore them to where they would have been without these massive losses.
ARNOLD: So even though there's been some progress, the economy is still entering a recession with a vulnerable and cautious banking system. That's bound to make it harder to get through the recession. Chris Arnold, NPR News.
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