never don’t be paranoid
In an all-time classic post, Interfluidity (I’ll call him by his revolutionary name) argues that the real trouble underlying this here financial crisis is not “too much” risk-taking but rather, in a sense, too little — investors childishly seeking safety at every turn, rather than assuming reasonable risks in a considered way.
On that note, today, Bloomberg:
Reserve Primary Fund became the first money-market fund in 14 years to expose investors to losses after writing off $785 million of debt issued by bankrupt Lehman Brothers Holdings Inc.
The fund, whose assets plunged more than 60 percent to $23 billion in the past two days, said the Lehman losses forced the net value of its assets below $1 a share, known as breaking the buck. Reserve Primary, the oldest money fund in the nation, fell to 97 cents a share and redemptions were suspended for as long as seven days.
The point of a money-market fund is supposed to be that it pays you reasonable interest but is very liquid (unlike, say, a six-month or longer-dated CD) and never loses value. But this sort of pseudo-guarantee of investment returns is always an ideological obfuscation of economic reality. There are no sure bets, only a buch of guys doing stuff, and sometimes, when you’re not watching, those guys buy the bonds of a shaky financial institution and lose the money that they basically promised you they’d never lose. Unless people use capital productively, all the guarantees in the world ultimately mean nothing. And no one has really been trying to arrange our “system” to make sure it uses capital productively, because that’s supposed to take care of itself.
