Greek Default Threatens Money Market Run That Treasury May Be Unable To Halt This Time

The phrase “the financial crisis” means many things to different people, but in its narrowest, most precise sense, it refers to the fact that after Lehman Brothers went bankrupt a mutual fund called the Reserve Fund “broke the buck” (i.e., lost money) which threatened an economy-wide run on money market funds. Money market funds are where most firms park their short-term savings, so a run on money market funds threatened to create a situation where all kinds of businesses would be suddenly unable to make payroll or finance accounts payable. Bad news, in other words. The responses to this were for the government to implicitly commit itself to not letting more large banks fail (“too big to fail” would be better known as “too likely to prompt a money market run to fail”) to guarantee existing money market funds, and ultimately to move to enact TARP.

But according to Landon Thomas, Jr.’s reporting for the New York Times (hat tip Tyler Cowen), there’s a threat of this happening again. This time not with the failure of an investment bank, but with a failure of Greece to pay its debts. Apparently “as of February, 44.3 percent of prime money market funds in the United States were invested in the short-term debt of European banks” including “French banks like Société Générale, Crédit Agricole and BNP Paribas” with significant exposure to Greek debt.

This time around, though, there may be a problem. As Brian Beutler explained last July, the Dodd-Frank Wall Street regulatory overhaul deprives Treasury of the legal authority that was used to backstop money market funds at the time. When Treasury officials were asked about this at a meeting with bloggers several months ago, they gestured in the direction of the idea that their resolution authority tools would help avoid a replay of the whole scenario. But Dodd-Frank obviously doesn’t give the Treasury Department the authority to engage in an orderly liquidation of Greece. That means, as best as I can tell, that we’re left to hope the folks running the European Union know what they’re doing even though very little in their recent performance bolsters that hope.