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Marcia Stigum Money Market Pdf Downloadl


Despite its frenzied and seemingly incoherent appearance to the outsider, the money market efficiently accomplishes vital functions every day. One is shifting vast sums of money between banks and other financial institutions. For banks, this shifting is required because many large banks, domestic and foreign, with the exception of very few, all need more funds than they obtain in deposits, whereas many smaller banks have more money deposited with them than they can profitably use internally.




Marcia Stigum Money Market Pdf Downloadl


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The money market also provides a means by which the surplus funds of cash-rich corporations and other institutions can be funneled to banks, corporations, and other institutions that need short-term money. In addition, in the money market, the U.S. Treasury can fund huge quantities of debt with ease. And the market provides the Fed with an arena in which to implement its monetary policy. This is where the money market gets the most attention, with investors throughout the world focused almost obsessively with what the Fed might do next. New instruments such as fed funds futures now make it possible to pinpoint precisely what the money market expects of the Fed. The varied activities of money market participants also determine the structure of short-term interest rates, for example, what the yields on Treasury bills of different maturities are and how much commercial paper issuers have to pay to borrow. The latter rate is an important cost to many corporations, and it influences in particular the interest rate that a consumer who buys a car on time will have to pay on his loan. The commercial paper market is also one that tends to be overlooked, despite the fact that it is twice the size of the Treasury bill market. Finally, one might mention that the U.S. money market is increasingly becoming an international short-term capital market. In it oil imports, semiconductor purchases, aircraft, and a lot of other non-U.S. trade are financed.


One of the most appealing characteristics of the money market is innovation. Compared with our other financial markets, the money market is lightly regulated. If someone wants to launch a new instrument or to try brokering or dealing in existing instruments in a new way, he does it. And when the idea is good, which it often is, a new facet of the market is born. Moreover, the market is always changing. In the very final stages of the writing of this book, for example, the Chicago Mercantile Exchange was announcing its intention to buy the Chicago Board of Trade, merging two futures exchanges where the money market is prominently featured. Many more innovative changes undoubtedly lie ahead for the money market.


This book is organized in a manner to enable readers with different backgrounds to read about and understand the money market. Part One contains introductory material for readers who know relatively little about the market. It is preface and prologue to Parts Two and Three, which are the heart of the book. Thus, readers may skim or skip Part One depending on their background and interests. They are, however, warned that they do so at their own peril, since an understanding of its contents is essential for grasping subtleties presented later in the book. Readers needing to gain a quick sense of particular subject matter will find the charts, supporting text, and end-of-chapter reviews useful tools. The footnotes serve as a useful reference to readers wishing to delve into topics more deeply.


Roughly defined, the U.S. capital market is composed of three major parts: the stock market, the bond market, and the money market. The money market, as opposed to the bond market, is a wholesale market for high-quality, short-term debt instruments, or IOUs.


Chronic deficits are more the norm for the business sector, which is to be expected, since every year the business sector receives a relatively small portion of total national income but yet has to finance a major share of national capital expenditures. Established business firms typically obtain relatively little new financing from the sale of new shares; the bulk of the funds they obtain to cover their deficits comes through the sale of bonds and money market instruments.


While examples of direct finance are easy to find, external financing more typically involves indirect finance. In that case, the funds flow from the surplus to the deficit unit via a financial intermediary. Banks, savings and loan associations, life insurance companies, pension funds, and mutual funds are all examples of financial intermediaries. As is apparent from this list, financial intermediaries differ widely in character. Nevertheless, they all perform basically the same function. Every financial intermediary solicits and obtains funds from funds-surplus units by offering in exchange for funds deposited with it claims against itself. Such claims, which take many forms including demand deposits, time deposits, money market and other mutual fund shares, and the cash value of life insurance policies, are known as indirect securities. Financial intermediaries use the funds they receive in exchange for the indirect securities they issue to invest in stocks, bonds, and other securities issued by ultimate funds-deficit units, that is, primary securities.


Federal Reserve statistics on the assets and liabilities of different sectors in the economy show the importance of financial intermediation. In particular, at the beginning of 2006, households, personal trusts, and nonprofit organizations, who, as a group, have historically been the major suppliers of external financing, held $35.4 trillion of financial assets. Of this total, $7.0 trillion represented time and savings deposits at commercial banks, other thrift institutions, and money market funds; $1.0 trillion, the cash value of their life insurance policies; $11.1 trillion, the reserves backing pensions eventually due them; and $4.5 trillion, mutual fund (other than money market) shares. Consumers also held $5.7 trillion of corporate equities, $864 billion of municipal securities, $854 billion of corporate and foreign bonds, $206 billion of U.S. savings bonds, $321 billion of Treasury securities, and $691 billion of agency- and GSE-backed securities. Thus the data show that over the years large amounts of money in consumer deposits have been channeled out of households running funds surpluses to other spending units through financial intermediation. The data also show that even larger amounts of monies have been channeled into the economy through the purchase of other financial assets.


As is explained in Chapter 3, banks borrow and lend excess reserves to one another in the federal funds market. The rate at which such lending and borrowing occurs is called the fed funds rate. When the Fed cuts back on the growth of bank reserves, this tightens the supply of reserves available to the banking system relative to its demand for them; that, in turn, drives up the fed funds rate, which, in turn, drives up other short-term interest rates. Thus, any easing or tightening by the Fed necessarily alters not only money supply growth, but interest rates as well.


The DIDC came up with, to the surprise of many observers, not one but two new accounts. The first, called the money market deposit account (MMDA), required the depositor, private or corporate, to maintain a minimum balance of $2,500 (subsequently eliminated); in exchange the depositor obtained a federally insured account on which she could write three checks and make three preauthorized withdrawals per month and on which the deposit-accepting institution could pay any rate it wished. The Fed chose to view this account as more akin to a savings than a demand deposit account and included it in M2.


The price of a monetarist policy in a highly inflationary economy was an extremely high degree of uncertainty with respect to rates in the capital market. This untoward consequence of monetarism could hardly be viewed as contributing to economic stability. The Fed knew this and wanted to feed to credit market participants money-supply numbers that delineated longer-term trends in monetary growth. Unfortunately, it could find no way to do so.


This paper examines the relationship between money market fund (MMF) risks and outcomes during crises, with a focus on the ABCP crisis in 2007 and the run on money funds in 2008. I analyze three broad types of MMF risks: portfolio risks arising from a fund's assets, investor risk reflecting the likelihood that a fund's shareholders will redeem shares disruptively, and sponsor risk due to uncertainty about MMF sponsors' support for distressed funds. I find that during the run on MMFs in September and October 2008, outflows were larger for MMFs that had previously exhibited greater degrees of all three types of risk. In contrast, as the asset - backed commercial paper (ABCP) crisis unfolded in 2007, many MMFs suffered capital losses, but investor flows were relatively unresponsive to risks, probably because investors correctly believed that sponsors would absorb the losses. However, the consequences of MMF risks were quite costly for some sponsors: Using a unique data set of sponsor interventions, I show that sponsor financial support was more likely for MMFs that previously earned higher gross yields (a measure of portfolio risk) and funds with bank - affiliated sponsors. Funds' gross yields and bank affiliation (but not funds' ratings) also would have helped forecast holdings of distressed ABCP. This paper provides some useful lessons for investors and policymakers. The significance of MMF risks in predicting poor outcomes in past crises highlights the importance of monitoring such risks, and I offer some useful proxies for doing so. The paper also argues for greater attention to the systemic risks posed by the industry's reliance on discretionary sponsor support.


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