When pigs fly?!?! - Treasury to insure money market funds! - Yes, REALLY!

File this under "When Pigs Fly"... the U.S. Treasury has actually announced that they will be fully insuring money market funds, both retail and institutional. Imagine that. Who would have thought? Sure, I have always imagined that eventually there would be an insurance program analogous to FDIC, if for no other reason than that some insurance companies would figure out how to milk that industry. I certainly didn't expect the government to jump in this quickly. But with the financial turmoil this week and a large retail money market actually "breaking the buck", it now makes a lot of sense.

In truth, MMF insurance is not really so much a matter of helping out the folks on Main Street as it is providing a lifeline to one of the few remaining viable businesses on Wall Street, commercial paper, medium term notes, and repurchase agreements, which are what the trillions of dollars of money market funds are based on.

With dramatic withdrawals from money market funds this week, there was probably very little demand for fresh commercial paper, medium term notes, and repurchase agreements. The problem is that a lot of businesses expect to be able to roll over their short-term debt, so a lack of demand for buying fresh short-term paper was likely causing a very dramatic liquidity crunch.

Sure, retail customers win as well, but it was in the interests of Wall Street that likely came first.

Next, we also need to see a dramatic hike in FDIC coverage. It is too easy for non-wealthy individuals to run above the $100,000 FDIC insurance limit. Sure, there are schemes like CDARS to work around the limit, but average people, including a lot of small business owners or people with a lifetime of savings or who sold a house, just do not have the time, energy, or expertise to waste on working around that limit. What is needed is to simply raise the limit to at least $2 million (or maybe $5 million or even $10 million). That would cover the lion-share of small businesses and individuals who have simply saved over a lifetime or maybe simply sold a house that appreciated over the years.

I think it would make more sense to fold the new Treasury MMF insurance into the FDIC program. I also think we need to state the charter of FDIC more clearly that it is a "reserve" for insuring deposits and that ultimately the U.S. Treasury itself is the full backstop. This would eliminate mindless discussions of whether FDIC technically "has enough money" to cover all losses. We should also look into whether FDIC insurance could be privatised, again with the U.S. Treasury as the ultimate, full backstop should "the unexpected" occur. From what I read recently, even Warren Buffett was unwilling to continue offering deposit insurance, but I would think he would be interested in offering a form of re-insurance where the U.S. Treasury would cover claims if a truly catastrophic crisis were ever to occur. Besides, the issue is not really paying claims for actual extreme events but simply people worrying about what would happen in potential extreme events.

I know Barack Obama disagrees (he actually said so), but we really do need a full-fledged commission (ala the 9/11 commission) to study the current financial episode and to propose a much more carefully thought-out longer-term approach to the simple problem of how to manage money.

-- Jack Krupansky