The Volokh Conspiracy

[Todd Zywicki, September 22, 2008 at 10:10am] Trackbacks

Unintended Consequences:

Why do I have a hunch that we'll be seeing a lot stories like this in the coming weeks:

Also yesterday, the Treasury Department issued a major caveat to its Friday announcement that it would guarantee investments in money-market mutual funds, emulating the long-standing federal guarantee of deposits in bank accounts. The Treasury said yesterday that it would only guarantee existing investments in money-market funds.

The caveat came after loud pressure from the banking industry, which worried that a guarantee on new investments would encourage customers to pull money from bank accounts because money-market funds, which pay higher interest rates, would now be seen as equally safe. Both banks and banking regulators were concerned about how an exodus of deposits could impact already-struggling banks.

Couldn't have seen that one coming, eh?

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pete (mail) (www):

There may be unintended consequences, but that announcement convinced me not to transfer my money from my money market to my checking account and probably convinced a couple of other million people who were thinking the same thing.

9.22.2008 11:26am

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Perry:

Another unintended consequence - people will still choose to willingly misunderstand the investments that they put their money into.

9.22.2008 11:33am

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Fuego di Dinero:

Considering that this is a liquidity crisis, forcing bank runs is not a very intelligent move. You'd think that would be the main thing to avoid here.

9.22.2008 11:53am

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Good for thee but not for me.:

Can we all pitch in and buy the Treasury folks a whiteboard and some dry erase markers. Then they can write up the problem, their proposed solution, then they can take a lunch break. During the break, we will have actual economists come in, erase the solution, then put up one that works or at least does not make things worse. I got 10 bucks over here.

9.22.2008 11:59am

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Nunzio:

Of course, the banks then would be forced to pay better interest rates.

If nothing else, I hope this whole debacle makes individuals more cognizant of how they get ripped off everyday by financial institutions

9.22.2008 3:12pm

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Roger Schlafly (www):

Unintended? These sorts of consequences always happen as a result of bailouts. Bailouts change incentives. Any bailout plan should include an analysis of those changed incentives, so there are no unintended consequences.

9.22.2008 4:41pm