×
This innocuous line of McMegan's describes rather a lot of what's behind the financial crisis:
This might be a good time for a brief primer on what a money market fund does (though of course, a better time would have been before we all plowed our money into them).Quick show of hands: Who can define "mortgage-backed security" even now?Although, frankly, if the money market funds go belly up, no one will care what a mortgage-backed security is. Money market funds are where, as my editor Harold Meyerson put it, Wall Street becomes Main Street. In general, direct stock ownership remains an elite phenomenon. But insofar as there's broad involvement in the stock market, it's through money market accounts and other varieties of pensions funds. On the bright side, if your money market account is administered through your bank, you're federally insured -- though the insurance is against collapse more than against losses -- and should only be moderately worried. If you're investing through another sort of brokerage, your situation is rather more precarious.It's also worth emphasizing another portion of Megan's post, as it's a particularly clear explanation of why the crisis is so widespread. "The problem," she writes, "is not that most of these funds are insolvent--they can't all have bought huge chunks of Lehman paper. The problem is that they're illiquid. If a large number of investors all try to sell out at once, they have to dump large blocs of assets at fire sale prices."In other words, not everyone is holding bad investments. But they still can't survive a panic wherein their whole customer base demands cash; they don't have that much liquid currency on hand. This is what we call a bank run, and it's a huge danger. The collapse of bad banks could start a panic that leads to runs on good banks -- customers, after all, don't know whose investments are secure and whose aren't, and may decide they need to get their money out of the market and under their mattress no matter who their brokerage is. This can trigger implosion in the good funds as easily as the bad.
