This morning’s story about the money market fund that “broke the buck” serves as a good reminder of the other big negative consequence of Alan Greenspan’s obsession with low interest rates. The big one, of course, was the housing bubble, but low rates also spurred a foolhardy reach for extra yield that ended in disaster.
Money market products have never been designed to yield much, but they usually would yield at least something. However after the internet bubble burst, the flight to safety coupled with Greenspan’s slashing of interest rates ensured that they’d yield absolutely zilch. But even managers tasked with making ultra-conservative investments try to generate some returns. Hence stories like Bruce Bent, or Auction-Rate Securities, which were sold as a “cash alternative” — they weren’t. Even the CDO market with its infamous AAA tranches were a result of money managers desperately looking for yield that carried a AAA-rating, so as to satisfy regulators that required a certain amount of AAA to be held.
Not that this is totally satisfactory this morning’s mystery: We’re not sure what happened to Bruce Bent, how a famously conservative money manager who scorned commercial paper could dive into Lehman Brothers. That, itself, isn’t Alan Greenspan’s fault — that sounds more like something that should be analysed on a comfy couch with a trained Freudian doing the question.
But if you’re looking for a root cause of the overall condition, post-bubble low rates are a good place to start.