Bill Donoghue is one of those irresponsible souls who seem to think faster than they talk, and he talks so fast that he usually answers your next question before you ask it. But there is something fitting in his style, because he has become the Howard Cosell of an astonishing new phenomenon: money market mutual funds.
Money market funds? In case you hadn't heard, they're mutual funds that invest in large -- typically $100,000 or more -- short-term securities: bank certificates of deposit; commercial paper, which is unsecured loans to corporations and banks; and U.S. Treasury securities. In 1979, the funds have quadrupled to nearly $42 billion; Donoghue, who runs a newsletter that he modestly calls Donoghue's Money Fund Report, thinks they may hit $100 billion in 1980.
These mutual funds represent something of a triumph of financial democracy. By merging amounts as small as a $1,000, they allow individuals to invest in higher-yielding securities once reserved for corporations and the very wealthy. Donoghue follows 75 funds and, in November, their average interest rate exceeded 12 percent.
But this is more than a financial innovation. Money is power, and the mobilization of such sums raises important political, social and economic issues. Not even Donoghue thinks the mutual funds could capture all consumer savings deposits, which stood at $1.1 trillion at the end of 1978. But as inflation consciousness spreads, they may compete for one-fifth to one-third of the total.
Traditional depository institutions -- banks, savings associations and credit unions -- could lose much of their base of personal savings. Conceivably funds could be drawn out of housing into corporate and government securities, or out of small cities and rural areas into the major big-city money centers. Federal regulatory agencies dramatized that threat last week by authorizing banks and savings associations to issue new savings certificates with sharply higher interest rates.
At one level, the competition pits Wall Street against Main Street. Most of the money market mutual funds are sold by brokerage houses. The brokers typically earn a management fee of 0.5 percent or less of the funds' assets.
But the real conflict is more complicated. It isn't so much between brokers and banks as between borrowers and lenders. For years, a variety of federal and local regulations effectively have subsidized borrowers at the expense of lenders.
It's easy to portray the regulations as hurting evil lending institutions and helping the average borrower, but that isn't how it was. The average Joe and Jane were also the lenders, and federal interest-rate ceilings prevented them from earning adequate interest rates on their savings. If borrowing rates were lowered somewhat by this cheap money -- and also by various state usury ceilings -- the extra inducement to take down real estate and consumer loans probably has added to today's inflationary momentum.
In any case, this artificial system is disintegrating, and money market mutual funds are a big part of the story. To see them as Everyman's antidote to inflation is an exaggeration, of course. They appeal primarily to the upper middle class, which probably means families with annual incomes exceeding $25,000 -- a group that includes about one-fourth of all families. Most of the mutual funds have minimum investment -- for example, $5,000 for Merrill Lynch & Co. Inc.'s Ready Assests Trust, which is the largest.
But this new mobility of savings also means that the old, subsidized borrowers may no longer get their accustomed share of credit. We now have a pool of nearly $300 billion in consumer deposits that is up for grabs by depository institutions and the mutual funds. That pool consists of the existing mutual funds and about $250 billion in six-month money market certificates at depository institutions.
Issued in minimum amounts of $10,000 these money market certificates -- not to be confused with the $100,000 certificates of deposit -- already constitute one-fourth of deposits at savings associations. By regulation, their interest rates are tied to the rates on Treasury bills. Inevitably the availability of these certificates has sensitized savers to higher market interest rates. Much of this money, therefore, is vulnerable to being transferred to mutual funds.
Why would anyone shift? Personal preference, mostly.
The money market certificates give you a fixed rate of interest for six months, which is good if rates go down but bad if they don't. The new savings certificates complicated the decision even further by offering slightly lower rates of interest and maturities of two and a half years. By contrast, the mutual funds give you the option of putting money in and taking it out at will. Savings associations, credit unions and banks -- especially small banks that have relied heavily on consumer deposits -- could lose deposits or experience reduced deposit growth. Their lending, particularly mortgage lending, could suffer.
That isn't inevitable, of course. All these institutions could attempt to sustain their lending by issuing their own $100,000 certificates of deposit, which would be bought by the mutual funds. In effect, the banking institutions would be borrowing the money back and, to some extent, this already has occurred. But such large-scale borrowing may be too great a leap of sophistication for many smaller banks and associations. They're competing with the certificates of deposit which big-city banks have offered for years and with the commercial paper of major corporations.
Moreover, this money-shuffling game might raise questions about the safety of the mutual funds. Donoghue is surely right when he argues that -- despite the absence of anything comparable to deposit insurance -- they are now safe. To meet withdrawal demands, the funds simply can sell securities. But as the funds expand, they not only will attract less knowledgeable investors but also induce the creation of more commercial paper and certificates of deposit. Quality may suffer.
The basic problem here cannot be made to disappear by repressing the mutual funds, but only by unshackling the banks and savings associations from all the government restrictions -- mostly in interest-rate limitations on deposits and loans -- that inhibit them from competing effectively for consumer deposits. Over the long run, that may mean slightly higher average loan rates. But it's the only way to assure the stability of our savings institutions and the continuity of credit flows.
Last week's column said U.S. apparent steel consumption in 1978 was 119 million tons. The correct figure is 116.6 million tons.