The Role of Money Market Funds (MMFs) in the Austrian Theory of Money: a Comment on Money and the Business Cycle

Abstract

Money market funds (MMFs) represent $3 trillion dollars in finan- cial industry assets. However, regulations regarding MMFs have increased substantially after various of them have “broken the buck” in the 2008 crisis. Moreover, negative interest rates have destroyed a great part of the MMF industry in Europe, since it is impossible to maintain a stable net asset value (NAV) and pay div- idends (which can be considered de facto interest payments) when the underlying assets have negative yields. Yet, despite the recent exodus of MMFs, MMFs rarely get into trouble. In 1978, First Multi- fund for Daily Income (FMDI) went bankrupt, with investors even- tually taking a 6% loss. Yet the average maturity of FMDI’s assets was longer than two years, so FMDI could hardly be considered a MMF. In 1994, the Community Bankers Fund “broke the buck,” leading to a 4% loss to shareholders; curiously, no “redemption run” (equivalent of a bank run) occurred. In 2008, the Reserve Pri- mary Fund “broke the buck” due to their exposure to Lehman, but eventually paid back 99 cents on the dollar (1% loss).