No. of Recommendations: 11
https://www.wsj.com/opinion/stablecoins-money-mark...
Stablecoins, Money-Market Funds and the S&L Crisis
Lightly regulated new financial instruments can have serious consequences if lawmakers and regulators aren’t careful.
By Thomas P. Vartanian, The Wall Street Journal
Celebrations over the recent passage of the Genius Act should be muted. It institutionalized cryptocurrencies in the U.S. by creating the first comprehensive regulations for stablecoins. But all too often when Washington lets new financial products on the scene, they aren’t adequately regulated and quickly gain an advantage over existing financial instruments that are more heavily policed. Market convulsions, economic downturns and bank failures follow. I watched it happen when money-market funds burst into the market in the 1980s, bringing banks to the brink of insolvency. Stablecoins could do the same thing….
While the Genius Act prohibits stablecoin issuers from paying interest, it doesn’t explicitly stop crypto exchanges and other intermediaries from doing so. If Congress and regulators aren’t eagle-eyed, exchanges have plenty of incentive to try. A report from the Treasury Department in April estimated stablecoins could lure $6.6 trillion in deposit outflows. That could cause the sort of disaster I witnessed 40 years ago.
Between 1979 and 1989, money-market funds grew more than 20-fold, sucking deposits out of the banking system which would have otherwise been converted into loans for homes, cars and businesses. The securities firms offering money-market funds benefited from a regulatory ambiguity as similar to the one that now affects stablecoins….
Some banks could adapt to the dramatic increase in interest they had to pay depositors because business loans were typically short-term with interest rates adjusting according to market conditions. But the regulatory change immediately locked savings and loans into a death spiral. They had no option but to borrow short by paying depositors interest of about 12% and lending long through 30-year fixed-rate home loans. That created an average negative spread of about 5% between what S&Ls earned on their mortgage portfolios and what they paid depositors. About 1,400 S&Ls collapsed over the next decade, as did the U.S. housing market, which relied almost entirely on S&Ls to finance mortgage loans. Some 1,600 commercial banks would also fail as the country settled into a deep recession….[end quote]
I remember the 1980s because I also transferred my savings from a bank into a money market fund that paid much higher interest. I had no idea that millions of others were doing the same or that it would lead to the S&L crisis and bank failures.
en.wikipedia.org
Savings and loan crisis
The savings and loan crisis of the 1980s and 1990s (commonly dubbed the S&L crisis) was the failure of approximately a third of the savings and loan associations (S&Ls or thrifts) in the United States between 1986 and 1995. ...
The total cost of taxpayers by the end of 1999 was $123.8 billion with an additional $29.1 billion of losses imposed onto the thrift industry. [end quote] (Not inflation adjusted; in today’s dollars it would be much more.)
I still don’t see the point of stablecoins or cryptocurrency in general. But if crypto currency stablecoins had a way of paying higher interest than money markets I would consider participating and transferring money.
Money markets currently provide a huge amount of liquidity to all kinds of short-term borrowers from corporations to the government. Sucking liquidity away could potentially cause a similar kind of crisis as those borrowers suddenly lost their lenders or were forced to pay higher interest rates to the crypto dealers.
There’s a lot of money involved.
Wendy
