Were money market funds a beneficial financial innovation? No.

Robert E. Litan has recently made a laudable effort at assessing the merits of financial innovations. However, I would like to take issue with his classification of money market funds as a beneficial innovation. On the contrary, I believe they are a typical example of innovation meant to benefit not ordinary individuals but financial institutions.

I always found it extraordinary that anyone would invest in money markets, as they offer returns that are both low and uncertain. In Europe, savings accounts pay a reasonable interest rate (not the paltry 0.25% offered by high street banks in the US). They are the savings instrument of choice. In offering these, the bank does its job: it bears risks it is equipped to manage as an institution.

By contrast, money market funds dump all risks on the investor, and collect a fee for doing nothing much. And this "innovation" ended up costing (or almost costing) taxpayers a lot, as money market funds had to be insured in a rush by the Treasury when Lehman Brothers failed.

In the end, money market funds conveniently avoided paying an insurance fee to the FDIC, yet taxpayers had to come to the rescue of investors regardless. Of course, managers got to keep their comfortable (and to some extent unearned) management fees.