Are Money-Market Funds the 'Other' Fiscal Cliff?

The Other Fiscal Cliff: Money-Market Funds

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While most lawmakers are engrossed in the minutiae of keeping the country from toppling over the fiscal cliff, there are more than a few trying to sort out the details of another important fight: how to reform money-market funds so that they won’t tank the economy if another financial disaster occurs.

It’s a battle not as many people are paying attention to, but one that is critical to the country’s fiscal health. People invest plenty of cash in these funds to the tune of $2.6 trillion — or as Heidi N. Moore reports in the Guardian, as much as is spent on healthcare annually. And for good reason.

Money-market funds are the “designated drivers” of the U.S. financial system, the safe, reliable friend that likes to go to the party, but doesn’t get too crazy so that at the end of the night everyone makes it home safely. Money-market accounts are funded by investors — usually $1,000 to open an account — and they invest in various securities like stocks and bonds. Investors collect some (not a lot) interest, much in the same way that mutual funds work. Unlike mutual funds, however, money-market funds have a history of being relatively safe (despite the fact that they aren’t federally insured). They loan U.S. and European banks money and get it right back, serving as the backbone of the economy.

So, when the economy crumbled in 2008, banks turned to money-market funds for that short-term lending to keep them afloat. However, enough investors had freaked out and removed their money that there was no support left, which is why the current conversations about money-market reform are so important.

Lawmakers want to make sure that this problem is resolved quickly and are drumming up ideas to fix the problem. Heidi N. Moore has more on what the government is doing to make sure that money-market funds stay reliable.