A Mirage, Not An Oasis: Easy Money and Financial Markets


By Fabio Cortes, David Jones and Evan Papageorgiou

Low interest rates and other central bank policies in the United States have sent investors looking for higher returns on their investments. Money is pouring into mutual funds and exchange-traded funds, which is fueling a mispricing of credit and a build-up of risks to liquidity in the markets—the ability to trade in assets of any size, at any time, and to find a ready buyer.

Mutual funds and exchange-trade funds are the largest owners of U.S. corporate and foreign bonds (Chart 1). This means they provide a lot of credit to grease the wheels of the financial system because they have taken investors’ money and lent it to corporates.

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Breaking the Buck—Reducing Systemic Risks Posed by Money Market Mutual Funds


By Jeanne Gobat

The breakdown of the short-term funding markets was one of the most striking features of the global financial crisis. Equally astonishing, and unexpected, was the central role that U.S. money market mutual funds played in contributing to this wholesale shut-down.

In our chapter on systemic liquidity risk in the October 2010 Global Financial Stability Report, we describe this aspect of the financial crisis and propose some concrete recommendations on how to fix it. Continue reading

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