Who broke the buck? A money market fund, the Reserve Primary Fund, was unable to preserve its $1 price per share. Losses on its portfolio of short-term, safe investments overwhelmed the fund’s earnings. The Wall Street Journal reported that the fund was the top performing money market fund in 2007. If you want safety in a money market fund, perhaps you don’t want the fund that does best in good times.
It’s OK: We’ve got a guarantee. The owner of an office building in London has a lease with Lehman. But don’t worry. They have an insurance policy to protect them if their tenant cannot pay the rent. The insurer: AIG.
Why would we think that? Today’s Wall Street Journal reports, “Mr. Paulson in particular was irked that Wall Street viewed him as a white knight for troubled firms.” Wall Street folk always think that the nation’s economy is in trouble when Wall Street is in trouble. That’s often not, perhaps usually not, the case. But Paulson, who is more Mr. Wall Street than Mr. Secretary of the Treasury, is in a panic. No wonder financiers look for him to bail them out.
Revival of the Penalty Rate: Walter Bagehot’s classic description of banking, Lombard Street, recommends that central bank lending be at a “penalty rate.” For decades, the Federal Reserve ignored this advice, setting the discount rate very low. The recent deal with AIG, however, carries a hefty interest rate. The question is, however, whether it’s high enough to compensate taxpayers for their risk.
Bill Conerly is principal of Conerly Consulting LLC, chief economist of abcInvesting.com, and was previously Senior Vice President at First Interstate Bank. Bill Conerly writes up-to-date comments on the economy on his blog called “Businomics” and produces a monthly audio magazine available on CD. Conerly is author of “Businomics™: From the Headlines to Your Bottom Line: How to Profit in Any Economic Cycle”, which connects the dots between the economic news and business decisions.