A stunning shift of savings dollars has occured in the past few months, caused by changing money market conditions and the introduction of money market deposit accounts that were designed to enable banks and savings and loans to compete with money market mutual funds. Since December, banks and S&Ls have drawn $254 billion to the new accounts from several sources - including the money market mutual funds, which have lost about $40 billion. The decline in interest rates paid on various savings instruments also has contributed to the flux by encouraging the search for higher yields.

Ten days ago, William Donoghue, publisher of Donoghue's Money Fund Report--which tracks the money market mutual funds--and James Christian, chief economist of the U.S. League of Savings Institutions, met with editors and reporters of The Washington Post to discuss the new competition between the two money market programs and what it means for savers, borrowers and the institutions offering them. The discussion begins with descriptions of savers and investors; later the two opponents suggest how those customers will be affected by the new accounts and other changes coming in the marketplace. Following are excerpts of the discussion, which was led by staff writer Nancy L. Ross:

QUESTION: We would like each of you to tell us why consumers should invest in your particular account. Why don't we begin with Jim. What are the reasons for investing in a money market deposit account?

JAMES CHRISTIAN: Well let's divide consumers, or households, into two brackets. You've got savers, people who want to put some money away; they want to make sure they get a decent return on it; they want to know whether they can get it back when they want it. But they're not managing their portfolio on a day-to-day basis.

And you've got investors, those people who are actively engaged in managing a diversified portfolio, which includes some stocks, bonds and equity funds and so on.

Savers went to money market mutual funds primarily because the depositories with whom they had done business for many, many years, and with whom they were probably very comfortable, simply did not have a competing instrument to offer them. Those people I think you will find coming home. They will be back to their local, regional institutions whether they be banks or savings and loan associations.

Investors, in the way that I've defined them, will probably stay right where they are with the money market funds. It's a very interesting vehicle for certain purposes. I can imagine if you want to move money through a single broker, want to put it in stocks one day and then you see the market's right to sell and haven't quite decided what you want to buy next, dump it off on the money market funds; you know it's going to pay a competitive rate, and it's convenient. You do all the stuff over the telephone. Those people are going to stay with the money market funds. Money market funds aren't dead as a consequence of the introduction of the MMDA. But they probably are past their heyday.

As they appear to the consumer there's probably not a great deal of difference between them. I think we're talking primarily about convenience vis-a -vis investment flexibility for a diversified portfolio. For the saver the MMDA is in your local institution; it's where you borrow your money; it's where you've got your other accounts; you can walk in and see a face behind the counter, and those things are important to people. And the rates are going to be ultimately roughly comparable. The MMDAs are yielding significantly more than money market funds as a group today. But those rates will move down as institutions begin to find the market.

Q: I've heard it suggested that the banks will continue to maintain a spread of 50 basis points or more between what they pay and what the money market funds pay.

CHRISTIAN: I don't think that's necessarily going to be the case. The banks and savings and loan associations are testing the market to figure where it is and how much of this money do we want. We don't want all of it. So you set a rate and you see how fast the money comes in. And as you begin to fill up, as it were, with as much money as you want, you begin dropping the rate. Probably you drop it to the point where you start losing. And if you find out you've got a little less of this money than you want, you'll kick the rate up a little bit.

Q: Bill, can we hear your arguments on why we should invest in money-market funds?

WILLIAM DONOGHUE: Well, let's get an idea of what this market looks like. The market, as I see it, is broken up into four major segments. There are savers, and those are people who make no decisions. Most of those people are still in passbook savings accounts. Seventy-five percent of the money that was in passbooks savings accounts five years ago is still in passbooks savings accounts. Those people are either fools or dead. They've been there forever. They're not going to move. Maybe they will move. Why the banks are trying to encourage them to move, I have no idea.

Savers becoming investors is the major category at this point that we're talking about. Savers becoming investors have moved a trillion--a million million--dollars from traditional forms of investment into the retail money market or money market-indexed accounts of some sort in the last five years. Eighty percent of those people, or 70 percent of those people, did so within their bank. The banks really never lost a significant market share.

Savers becoming investors are a unique breed because they make a decision every six months, which is more frequently than most people investing in the stock market make decisions. And you're rolling over a six-month money-market certificate, which is the predominant instrument in the retail money market; you make a decision every six months.

The next category of people is investors. They are people who make more conscious decisions about what they're doing, and they have a greater repertoire they're willing to work with of investments. They're a good market for a lot of people.

The last category is speculators. Speculators are people who can afford to lose their money and, more frequently than not, do. They invest in commodities and say goodbye to their money.

Now, given that you've got those four categories, you then have three types of people offering services to them. You have the stockbrokers--and there you're basically talking about Cash Management Account-kind of programs. Those people don't care about savers; they only care slightly about savers becoming investors. Their focus is on investors and speculators. They want people who will generate commissions for them. They're interested in buying and selling securities. They're not interested in parking money. They're interested in building relationships.

The next group that offers the services are the families of funds, and I'm talking specifically here of no-loads. Those savers becoming investors and investors are in this middle category. They're interested in the family of funds. Savers are moving into money funds; they're willing then to think about other types of funds. It is a major philosophical step for them. They go from a fixed-principal, fixed-return investment, like the passbook savings account; they've made the logical step to fixed-net asset value, variable return of a money fund, and now I think they're beginning to make the next step, which is from a money fund to a variable-principal, variable-return instrument like a stock fund. And that's a new concept for a lot of people, and no-load funds, I think, are the answer for those people.

The next people are the ones offering insured accounts. And on more than a number of occasions I've pointed out to people who've got really excited about insured accounts being superior to uninsured accounts by pointing out the only people who lost money in the money market last year were in insured accounts. And they paid an early redemption penalty, which was the only source of income for some of your members. The insured people are focusing on savers and some of the savers becoming investors. They have 80 percent--or 70 to 80 percent--of the savers-becoming-investors market.

Now, what should a consumer be doing as an individual? A small saver--one having only $2,500 or less--for them a money fund is best or perhaps your 30-month small savers certificates where they can tie up their money and not think about it for 30 months, and sometimes they are very attractive.

The modest saver should look at a money market deposit account closely, or if he's in a 40 percent tax bracket or higher--and that means you're making $35,000 to $45,000 depending on whether or not you're individual or filing a joint return--you're better off in a tax-free money fund.

If you're a saver becoming investor, you should be in a stock fund. A mutual fund that invests in stock. You should not be in the money market. You have better opportunities in the stock market now until rates go back up to about 9 percent, and then start going back into the money funds.

The large SLY saver should be about 50 percent in the stock fund and 50 percent in the money market deposit account of the worst managed, most risky, most desperate financial institution in the country, and I'm sure that a membership list of yours would help because those people are offering some very high rates and will continue to offer some high rates because liquidity means that the manager of an S&L will be able to continue to have his job and be able to avoid mergers as long as he can project nine months until he's going to fail.

For the paranoid investor, the investor who really wants safety, safety, safety, regardless of what happens, 5 percent in gold--if we get hyper-inflation it will increase in value 20-fold, protecting his entire investment--and 5 percent in long-term government bonds--if we get deflation we go back to 1 or 2 percent, it will benefit. The rest of it I would put either in a money market deposit account or some Treasury bills. I wouldn't put more than $100,000 per institution, per individual, although you can spread that around a little bit, and I would look at T-bills or T-bill money funds for the paranoid investor.

So you see you really don't need a bank in most of those transactions, and the bank really is probably not going to be your best choice.

Q: Do you want to respond to Bill?

CHRISTIAN: Some of Bill's information or some of the points that he made are interesting. I think some of the asides about how dumb people are to keep money in a certain place, you know that's dumb only from a certain perspective. It's dumb from the perspective of someone who thinks only in terms of yield and yield alone. Now it will be interesting to see over the course of the year how well the stock market continues to do. We're into the realm of forecasting now rather than deciding exactly what a consumer or a household ought to do with their funds and what best works for them. If you're talking about yield and yield alone there are all kinds of options.

Q: One of the criticisms that comes to me is the confusion surrounding these accounts from potential investors or depositors. Would you discuss the advertising for money market accounts and also the terms they offer. Do you feel that the advertising is misleading?

DONOGHUE: If an account is directly equivalent to money market mutual funds, its advertising provides full disclosure. That's my opinion. Full disclosure is not required of bank ads. I have seen ads for some of the largest institutions in this country which you could not determine anything as simple as their rate. The advertising on the money-market deposit accounts--and I should say that they are not a standard product, they're all different, and that's a problem for a lot of people and it's confusing--has been pretty bad. It's been very effective for the institutions, but it's not been particularly good informing investors what it is that you're involved in.

CHRISTIAN: I think what would be helpful to The Post's readership is that we talk about what questions you should ask, not about who's abusing whom and who's lying about what. The questions that individuals ought to ask have to do with what's the compound interest? Or what is the annual percentage rate APR of return?

You know, we could compile a list about the relevant questions people ought to ask and why it's important, although I do think that most banks and savings and loans association are reporting APR. They may be advertising 20 percent, which some banks and S&Ls did in Atlanta, and it was virtually the only place in the country that did that. It's a premium; it's the same thing as giving away toasters or electric blankets or whatever they all did for such a long time. But when you look hard at what the institution is saying that it is prepared to deliver on, then you understand what you're getting into, and I think that's really what deregulation is all about. That's the way a market is supposed to work--informed customers operating to make their own decision for what is right for them.

Q: Let's go to the question of safety. As Bill is fond of saying, nobody's lost a dime in money market funds. But is there any problem posed by the liquidation of assets if the present trend of outflow from money market funds continues?

DONOGHUE: I think I figured 15 percent of the assets of money funds have left in about eight weeks. It has been done orderly, there has been no one who has been denied their money that I've heard anything at all about. I would say just for comparison that no bank or thrift in this country to my knowledge could stand a 15 percent decline of assets in that short a period without federal assistance. Money funds have always promised and their biggest selling point has been you can get out of them easily. When you want your money it's there, and they've proven that.

CHRISTIAN: For almost the entirety though of 1982, six-month money market certificates from banks and savings and loan associations would have earned better than any money market fund, likewise a 30-month CD, and after taxes, the All-Savers certificate. The money market funds did not have, you know, a total corner on yields.

DONOGHUE: No, but then again in August when the stock market started taking off I wouldn't have wanted to pay the three-months interest penalty to get my money back and start off again.

CHRISTIAN: That's true. And, if you rememember, at the outset of the discussion I conceded quite readily that there was a place for money market mutual funds for people who were diversified investors, or investors operating and managing a diversified portfolio.

DONOGHUE: However, if you didn't want the diversification and you did want safety, liquidity and yield, if you'd have bought a Treasury bill at the same time as you would have bought your six-month certificate, you would have always earned more at a higher real return; you would have had more safety--full faith in credit as opposed to insurance--and you would have had liquidity. You could have sold at any point in time, and you would have sold in a declining interest rate market, which means you would have sold at a profit as opposed to having a three-month penalty.

CHRISTIAN: One of the next major issues that has to be faced in the process of deregulation is a revision in the early withdrawal penalties. I think what you will see coming there is what I would call either replacement-cost penalty or a market penalty that will recognize both capital gains and losses to the depositor if he chooses to, let's say, opt out of his contract on a particular term deposit, that is to say, a six-month or a 30-month CD.

Q: I'd like to hear from both of you on what levels we can expect for money market fund assets and money market deposit accounts in the next year.

DONOGHUE: I have changed my mind a bit. I haven't changed my mind from my initial position, which was essentially that money fund assets by the end of 1983 would either be at $175 billion or $275 billion and probably nowhere in between. I'm not sure that I or most people anticipated that the banks would market this so aggressively and at such cost to themselves. I expected the money market deposit accounts to grow substantially but not from the money in money funds. I guess the question really boils down to will the banks and the S&Ls find a formula by which they can make money on this account. I don't think the new accounts in general for most institutions are profitable.

CHRISTIAN: The volume in the accounts already exceeds my estimate for the year. I am greatly astounded that in the span of roughly two weeks $100 billion moved into this account. I think what you will see now, because there are an awful lot of institutions that are astounded as well, you should begin to see rates dropping. They've got probably right now as much as they want. So they're going to drop it until they can see how stable these funds are, and that's a critical, critical point. We have learned something from the behavior of the money market funds over the last few years, that those accounts did not seem to be highly unstable, so we're hopeful that they will stabilize. And I think something on the order of a couple of hundred billion in those accounts at all institutions, which we seem to be very close to right now, is what we should have for the year. I would be hard pressed to justify in my own mind a volume in the MMDA in excess of $250 billion.

Q: Maybe you'd like to now address the comments that Bill made about profitability.

CHRISTIAN: I really don't know why this is so, but everybody--they focus on the passbook. The passbook for a long time has been a very small proportion of our liabilities, somewhat larger for banks, by percentage terms not enormous. Let me just note what the passbook shifts were in December. I don't have January. In December while the banks were moving $61.8 billion into the money market deposit account they were losing $3 billion in passbooks. Three billion dollars. Savings and loans were moving $39 billion into money market accounts and losing $7.8 billion in passbooks. What's the big deal? Now, what we were rolling in January in six-month market certificates--we took down $6.9 billion in six-month money market certificates that probably rolled into the money market accounts. Those were 12 percent MMCs that we were locked into for six months at a guaranteed rate.

What happens with the MMA, and why it's not a bad account to have among the family of accounts in depository institutions, is that when rates fall you get rate relief, when rates rise you take it, but we have a very interesting device now. You can, if you are sufficiently sensitive to fluctuating money costs, you can lock those spreads by hedging financial futures. It doesn't hurt the depositors a bit. But it protects the institution's spread, and this is one of the extremely important new powers that we've got.

The financial-management techniques that have become available to savings institutions--and to banks--are very important. One of the things that regulation imposed upon us was you can't do this, you can't do that, you can't do the other. You must do A, B, C and D. The opportunities in this environment are open, and some very important new tools are in place to protect against some of the dire consequences that you might see superficially.

DONOGHUE: What he's saying is that the financial futures market provides some opportunities for the S&Ls to hedge against some of their risks, and do so intelligently, and I would say probably, you know, the dozen or so MBAs that that industry employs probably understand that, and only a few of those might. You know, it is not an industry that's attracted a large portion of very sophisticated people, and it's not needed that and won't pay them.

CHRISTIAN: Bill, we'll have to get you to some of our meetings because you have a very stale view of what's going on out there.

DONOGHUE: But there are some S&Ls that are very sophisticated and can do that. Money funds, on the other hand, don't do that. They don't do financial futures. Theoretically, it can be permmitted in the prospectus of a money fund but because securities regulation actually almost overworks on behalf of the investor, to describe the transaction that they'd have to do would be enough to convince you not to invest in the fund.

Q: Jim, do you have any statistics on the percentage of new money that is coming into savings and loans?

CHRISTIAN: If you look at the shifts, we lost $100 million out of transactions accounts, $7.8 billion out of passbooks, $4.4 billion out of the seven- to 31-day account, $400 million in the 91-day account, $6.9 billion out of the MMC, $500 million rolloff of All Savers. IRAs increased by $800 million, the 30-month certificate increased by $1.6 billion, the 3 1/2-year account increased by $1.2 billion and the CDs went down by minus $4.4 billion. And add that all up together and you've got total shifts of about $20.9 billion.

We took in $38.8 billion in the money market deposit account. All of that didn't come out of money market funds, but my horseback guess would be something around $9 billion came out of the money market funds. Now that's in a period when they were dropping about $25 billion.

DONOGHUE: Maybe 7 percent of the money coming into money market deposit accounts came from money funds. On the other hand, 34.8 percent came from commercial bank time deposits alone.

CHRISTIAN: You're always going to get shifts.

The Bank Board's estimates, which makes them official, for whatever that's worth, for December was 20 percent new money. We took in nine, almost 10 billion dollars net new deposits in December.

DONOGHUE: I was very proud of the money fund shareholders in that when they saw such outrageous rates being offered by insured institutions that they took advantage of them.

Q: Recently we have seen one or two funds which have announced insurance on their funds. There are a number of others that have link-ups with banks and I think thrifts in some cases, to provide money market accounts on which they charge a fee or commission. Where do you see this trend going?

DONOGHUE: There are some tremendous opportunities for synergy between a wide range of institutions. Money funds have been leaders in innovating that synergy. They created a way for consumers to invest in commercial paper and CDs and the whole money market. What they're doing now is they're looking very closely at relationships. And saying, okay, it was easy to sell money funds because interest rates were high; now interest rates normally are lower and we have to offer a broader range of services. When one starts looking at the relationship between institutions, and profitability--because these people are businessmen--if you look at selling money market deposit accounts, that's more profitable for a money-fund manager than selling money funds. In fact, some of these rates have been so high some of the money funds are actually investing in money market deposit accounts. There's a relationship that works.

Once banks and S&Ls get over the euphoria of this initial flush of money that they got, then I think they're going to be a lot more rational talking about where they get continuing sources of stable money in the future. A lot of people don't realize, deregulation did not start on November the 15th; it started on September the 15th. And that was when they deregulated deposit brokerage. Any bona fide broker can sell any bank deposits or S&L deposits anywhere in the country at any rate that the institution can legally pay, and the institution can pay the marketer, the broker, any fee they want to. Suppose I'm a money fund and I have a choice. I can sell you what you want, happens to be a money market deposit account. Suppose I could take 100 basis points spread on that, and that might be cheaper than the institution's cost of advertising for that money and he gets performance, not ifs with advertising, which is taking a risk. I can probably net 90 basis points on that. Whereas if I ran it through my money fund I got a 50 basis point gross or a management fee, and maybe I net 10 or 20.

And we're going to see a lot more of these things, and as we see these combinations then we see this whole need to regulate the whole thing because it's changed.

CHRISTIAN: Let me first say that I'm delighted that Bill and I have at last found some ground on which we can agree. I do see very much in the same way that Bill does a growing, let's call it network of financial services. For such a long time savings and loans and banks have been beating each other over the heads, and more recently all depositories and money market funds have been beating each other over the heads. Now I think, as some of the massive changes that have been made in the structure of the financial system get to be a little more comfortable for all the institutions, that they are going to find more ways in which to collaborate. It's going to be a much more interesting market and probably one that serves the consumer a lot better.

Q: What is the effect on the availability of funds to housing and to corporations?

DONOGHUE: Allowing thrift institutions to pay higher rates on more accounts simply raises their costs. A rational businessman with higher costs charges higher prices. Mortgage rates will not go down as far as they would have, and this will hurt the housing market. It may also hurt our economic recovery because somebody's got to pay for the 21 percent yields and even the ones that are only 100 basis points over the market; somebody's got to pay for that, and it's either got to be service charges, which has got to be coming for everybody, or it's going to be higher rates on loans.

Now let's face it. The big businesses, the safest loans, you're now talking about a national market. And you can get as much as everybody gets on rates. However, the poor little businessman, he's got one choice. If he walks into the bank across the street to open a checking account his banker's going to hear about it. And he's very nervous about that relationship because he may need to borrow money. If he goes to borrow money, he's going to pay more than he would have before. And those little businesses are the ones that are going to get hit most hardest. Let's at least hope they can get interest on a checking account to offset some of those costs.

CHRISTIAN: Savings institutions, I think, are going to take MMDA money only up to a point. What it will force them to do, as it is doing already, is moving them into longer-term instruments, which we now have. And which are doing reasonably well, thank you. The 3 1/2-year, the 2 1/2-year stuff, and that is what is going to go into mortgages.

Maybe if it turns out that the experience with the MMDA is as good in terms of stability as the MMFs have been, then some of that money is going to go into mortgages. I'm not saying all of it, but some of it is.

Q: What kind of a mortgage rate are you talking about?

CHRISTIAN: The current mortgage rate is around 13. And that's. . .

Q: That's a big spread with the rates S&Ls are playing depositors .

CHRISTIAN: Well, you've got to look at a couple of things. You've got to look at where you can sell that mortgage if you need to. And the capital market says 13. Now are you going to do the dumb thing and offer it at 11? Then you'd be doing the dumb thing. Because if the secondary market won't accommodate the mortgage that you make, then that mortgage has zippo liquidity without a capital loss being taken on it. That we're not going to do again. Now we are going to look more at adjustable mortgages and push adjustable mortgages a lot more. If you've got to pay to the market in order to get funds, hey, you've got to charge them that way, too.

Q: Does that mean that your industry is no longer going to make long-term, fixed-rate mortgages?

CHRISTIAN: We'll make some. But they will be mortgages that we probably will sell out to the pension funds, to insurance companies who have a particular flow of funds that will match them. Now our liability structure is a consequence of deregulation and the market.

And we shouldn't blow the MMDA out of proportion here. It's a hot new item, and there is no question about that. But what is going on less visibly is an enormous amount of asset and liability restructuring within the savings and loan business.

Q: So not very much is going to be different in the mortgage market as a result of the advent of these new kinds of things?

CHRISTIAN: I don't think so.

Q: What about the possibility and/or the desirability of re-regulation? What's your opinion on that?

DONOGHUE: I think some of the over-enthusiastic advertising of the new products is inviting regulation. It needs to be regulated. Also, as we're seeing the potential for tremendous shifts of funds between different types of borrowers, between different types of accounts, and not for particularly rational business reasons but for enthusiasm after getting the shackles off. You know: "We'll go out and get all the money. Hey, we got it, now what will we do with it?" I think they're asking for a set of rules which says, maybe you shouldn't do that.

Q: Are you talking about regulation of advertising and rates?

DONOGHUE: No, not rates. And that's one misunderstanding that's been going all through the last five years. When he Christian says regulation he means restrictions on what he can pay. When I say regulation, I mean restriction on how it can operate.

CHRISTIAN: Let me speak for myself.

Let's be extremely careful with the term "re-regulation." The first time that I met Bill--I can't help but remember this--was at a DIDC meeting. We were taking our lumps, and we had just managed to persuade the DIDC not to double our passbook rates. Bill said, "Hi, how are you? When are you guys going to start competing?" And here we are. Now Bill's talking about re-regulation. Of course, he doesn't mean on rates, and that's fine. That some of the things that we have seen just in the last few months are indicative of a reexamination process, maybe.

Let's make no mistake that financial institutions are, in the law school terms, "affected with a public interest." There is decidedly a need for regulatory agencies to look over their shoulders and say, "That's not a safe practice, that's not a sound practice." I hope that we will find that market discipline will be adequate on rates. If we're crazy, and take on too much interest rate risk, well, maybe there ought to be somebody looking over our shoulder. I'm not prepared to concede that yet. I have a tremendous amount of faith, and I'm very impressed with what I have seen going on with savings and loan management in a very short period of time. Those guys are moving, getting smarter.

And we've even added three more MBA's to the outfit.