The Money Market Mutual Fund Industry: First Do No Harm

Chairman Mary Schapiro of the Securities and Exchange Commission announced Wednesday that she did not have the required votes among the SEC commissioners to proceed with new proposed regulations on money market mutual funds (MMFs).

In her statement, she then urged other policymakers to act “to address the systemic risks posed by money market funds.”

This acknowledgment that any reform must be carried by other regulatory bodies is appropriate. Other regulators have been pushing reform even though Ms. Schapiro’s commission is the only agency that has direct authority over MMFs.

The true agency pushing reform has been the Federal Reserve System, even though the Fed has no direct regulatory authority over MMFs. For the Fed has made it a top priority to impose new and, I might add, destructive regulations on MMFs.

These proposed new rules represent a self-initiated bailout for the Federal Reserve System itself, designed to protect the Fed from the consequences of its own mistakes over the past four years. Because the Fed owns so many long-term bonds at such low yields, any significant rise in market interest rates would result in a large drop in the value of Fed assets, driving the Fed into insolvency.

Download the full editorial by Dr. Arthur Laffer that appeared in Investor’s Business Daily.

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“The Money Market Mutual Fund Industry: First Do No Harm.”