Last week we looked at the pros and cons of the new money market deposit account and the Super-NOW account from the saver's point of view. This week we'll consider the other side.
One of the reasons the new accounts were authorized for banks and savings and loan associations was to provide them with a savings instrument that was competitive with the investment industry's money market mutual funds.
Disintermediation--the movement of funds by depositors from accounts at the depository institutions to direct investment media like the money funds--had cost the savings institutions dearly.
More than $225 billion had found its way to the money market mutual funds by last December, before the availability of the new accounts stopped the hemorrhaging.
The hope is that a reversal of the flow of depositor money and an influx of new accounts will make it possible for the savings institutions to offer more dollars at lower interest cost for consumer and business borrowing, helping to spur an economic recovery.
I'm afraid it won't work quite that way. The problem hasn't been a shortage of funds as much as the cost of funds. After all, the money-fund managers didn't bury those billions of dollars in the backyard.
On the contrary, all that money flowed through the funds into the credit market, where it went to buy government securities, corporate short-term notes or savings institution certificates.
So a large part of the money-fund dollars found its way back to the banks--but at a high cost. Compared with the 5 1/4 or 5 1/2 percent that the banks and S&Ls had been paying their depositors, the 18 or 19 percent they had to pay for a while on short-term CDs looked like highway robbery.
But now money market fund yields are down to a more believable 8 1/2 percent--which means that the gross yield on their portfolios before expenses and management fees is running perhaps 9 1/2 percent.
If the money market deposit accounts are to be competitive with the money market mutual funds, they will have to pay in the neighborhood of 8 1/2 percent too.
Add the extra cost to the bank or S&L of processing 500 or 600 individual accounts as opposed to a single $5 million CD, and you're back to the same 9 1/2 percent cost of money again.
Compounding the problem is the fact that some of the money moving into the new accounts certainly comes from their own present passbook accounts and ordinary NOW accounts, on which they had been paying much lower rates.
My guess is that the overall cost of money to the savings institutions is going to go up a little, making it unlikely that individual borrowing costs will drop as a result of these new accounts (although other money market factors may cause a move in that direction).
For savers and investors this major step toward deregulation of the financial institutions provides a greater number and variety of investment media.
And to the deposit institutions themselves these two new accounts offer an opportunity for better control of the cost of funds plus an extra hook on which to hang more of their customers' money.
But you may be disappointed if you're looking for a reduction in the cost of mortgages or car loans as a direct result of the new accounts.
While an increase in savings institution deposits is likely, the total amount of savings dollars in the pool will grow very little. Like the All-Savers certificates of 1981, I don't expect either of the new accounts to do anything to reduce the cost of money.
Despite that pessimistic view for borrowers, those of you with cash available should certainly look at these new opportunities.