I’ll also admit that as an FDIC regulated banker I’m biased towards banks being the keepers of safe liquid assets.

The FDIC has never needed a dime of taxpayer money to meet their obligations. It is an entirely industry funded safety mechanism. It absolutly benifits from the full faith and credit of the treasury backing it up… but it has never called upon that line.

Money market funds froze in the crisis… it was only an implicit emergency guarentee that kept them from failing in mass. Yes the same was and is true of banks… but again, banks paid for it through good times and in bad via their FDIC premiums.

Focus for a minute on Merkel’s accurate observation that money funds have a much smaller asset/libility mismatch. He argues that’s a good thing… I’ll respond that the most imporntant assets society requires (from the tractors that plant our crops to the trucks that transport them to the plants that transform corn into cornflakes)… those assets can’t be funded with short term paper.

As we watch the money market industy shrink remember that it is shrinking from both ends. Consumers have little use for an asset which currently delivers risk without return. Companies have learned that cheap funding is little comfort if it can be withdrawn in a moments notice… espically when they can borrow for 10 years at 2%.

David Merkel’s second opinion, with some excellent points:

http://alephblog.com/2012/06/23/dont-bla me-money-market-funds/

What better company to finance a third of its longterm assets with overnight money.

GE was probably the biggest and best example but their was, is, and will continue to be a 10 to 1 global imbalance between assets people want 100% safe and on call at a moments notice and approperate counterparties on the other side of the trade.

The size and scope of JPM’s cheif investment office is proof positve that even the largest and best run banks in the world can’t deploy mountians of hot money deposits safely.

The implication seems to be that before the crisis there was a larger share of nonfinancial commercial paper issuers. This is not true.

Financial businesses have *always* issued the majority of commercial paper. And since the crisis, the financial share has fallen, not risen. In fact, the current share of commercial paper outstanding issued by financials — 53 percent — is the lowest it has been since the data begins in 1945.