Thursday, October 14, 2010

Where is the money going?


Money is flowing out of Institutional money market funds run by big places like State Street. They typically take cash in from institutional investors (money managers, banks, trust companies, and their money management clients) and invest in all kinds of paper that, prior to 2008 at least, was thought to be high grade, like high-grade commercial paper (which actually is high grade) and CDO crap (which was rated high grade, but was not). One plausible explanation for the outflow is that people don't trust these funds as much and so they own less of them.

What are they doing with the money instead? I suspect that its in the bank, waiting to be borrowed. Banks currently have "excess reserves" which is related to the collapse in the money multiplier in the last post. The Fed can create reserves, but if there is no demand for loans, then this wont translate into an increase in economic activity.

HT: Merle Hazard

2 comments:

  1. "The Fed can create reserves, but if there is no demand for loans, then this wont translate into an increase in economic activity."
    This doesn't follow, the banks can use it to buy assets instead of giving loans.

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  2. I should add, the reason it is staying in the banks is because the federal reserve is paying interests on excess reserves.

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