The writer is an associate professor of finance at the University of Chicago Booth School of Business
There is a love-hate relationship between the US Federal Reserve, regulators and money market funds, a $5tn industry at the heart of short-term funding, shadow banking, monetary policy, and the dollar-centric international financial system.
Broadly speaking, there are two types of money market funds in the US: prime and government funds. Prime funds can lend to all sectors of the economy with or without collateral. Government funds are only allowed to hold Treasury securities or lend to other sectors against Treasury collateral.
Prime funds have long been viewed as a source of vulnerability, while government funds have been viewed as a source of strength. But the bad kid might be getting too much blame and the good kid too much credit.
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