Close eyes on money market funds

The Federal Reserve announced yesterday would provide up to $540 billion in loans to help relieve pressure on money-market mutual funds beset by redemptions.

The initiative is the third government effort to aid the funds, which usually provide a key source of short-term financing for banks and companies. Last month, the Fed agreed to give loans to banks so they can buy back asset-backed commercial paper from money funds. There was $122.8 billion of such loans outstanding as of Oct. 15. The Treasury separately used a $50 billion emergency pool as well.

How important is the money market funds for U.S. credit market? U.S. money-market funds held more than 63 percent of outstanding unsecured commercial paper and 39 percent of asset- backed commercial paper at the beginning of September. If this source dries up, U.S. banks and companies have to shut down in a considerable number.

What the Fed and the Treasury did is to give a liquidity buffer to credit market, and ultimately avoid the “Great Depression II”. But it will take a lot of pressure off the Fed and the Treasury. Once their balance sheets keep deteriorating, the next shoe to drop is Treasury bills! United States of America will go bankruptcy!