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Our recent article criticizing the S.E.C. for the toothless regulation of money market funds it’s proposed drew and outpouring of comment, mainly from readers who stuck up for the funds, and pointed out the value they’ve added to the society in general.

All of which is completely irrelevant. The main problem with money funds is this: they are unregulated banks. Which is to say, they operate without any of the safeguards banking customers take for granted. In particular, funds face no oversight and, most important of all, have no minimum capital requirements. Yet they basically do the same thing banks do: make loans, accept deposits, take maturity risks, and serve the general public.

Oh, and they siphon deposits from the real, regulated banking system.

Why would anybody think that’s a good idea? Would anyone support the idea of a large system of non-bank banks that operate under no capital constraints and without any government supervision? It was a regulatory breakdown that helped cause the financial crisis in the first place, yet a lot of people seem to think that even less regulatory oversight of de facto banks is a good idea. That’s nuts.

If the feds want to reform our financial system, proper regulation of money market funds would be a good place to start.

Source: Money Market Funds: Basically Unregulated Banks