Wednesday, September 17, 2008

What Happens If There Is A Run On Money Markets? Is There A "Money Market Mutual Fund Holiday" Ahead?

News that the  Reserve Primary Fund, the oldest mutual fund in the country with $64 billion under management, has broken the buck and frozen resumptions for 7 days, is not good.

Edges of panic are beginning to appear throughout the system. There is a flight to absolute safety. 3-month T-Bills are trading to yield 0.558% ( yield not seen since 1954!).  Gold, as I write, is up over $88.50.

Clearly, gold and Treasury bills are the only safe havens in investors eyes. If another money market mutual fund freezes redemptions, all out panic could ensue. How exactly does the government stop that panic? The possibility of freezing all money market funds in a "money market mutual fund holiday," à la the Great Depressiom "Bank Holidays", can not be ruled out. The Fed and Treasury would then buy themselves some time to pump money into the entire money market mutual fund system, somehow.

Pray it doesn't come to this, but if money market mutual fund redemptions begin to soar, I see no alternative.

-Robert Wenzel 

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