The Economist this week writes on "Money-market funds: A boom amid the bust." The article discusses money market mutual funds' development and popularity among institutions, as well as funds' role in, and windfall from, the current credit crunch.

The article says, "Long an unexciting province within asset management, money funds have played a big role in the crunch. They bought much of the short-term debt that propped up structured finance. It was their sudden withdrawal that caused the market in asset-backed commercial paper (ABCP) to seize up. And banks' liquidity problems are largely the result of money funds' recent reluctance to hold their debt."

"If this makes them villains, then crime pays. Money funds have been taking market share from banks for years: big banks were less interested in competing for deposits during the securitisation boom, since they were selling on their loans. The crisis only accelerated this shift, since money funds were seen as one of few havens. In America, the biggest market, their assets have increased by 39% over the past year, to a record $3.5 trillion, even as returns have fallen," says the weekly.

The Economist also sources a Crane Data & ICI chart of annual asset growth and returns, and adds, "Money funds have also benefited from a withering of the competition. Ultra-short bond funds and enhanced-cash funds, which touted themselves as cash alternatives but invested in spicier debt than true money funds are allowed to, have fallen by the wayside. Peter Crane of Money Fund Intelligence, a newsletter, puts their combined assets at $70 billion, down from over $600 billion before the crisis. Meanwhile, the market for auction-rate securities is a shadow of what it was."

Finally, the Economist says, "Will money funds be able to hold on to the huge inflows? Mr Crane expects America's to continue registering double-digit annual asset growth. On the other hand, the funds tend to suffer when short-term interest rates rise, or when turmoil subsides. In a recent report, Jan Loeys, an economist at JPMorgan, predicted a bleak future for the funds in which the banks that have become so dependent on them fight back. As the lend-and-hold model of banking regains ground, he argues, so banks' interest in cutting out those interposed between them and their retail customers will grow. Already they are jostling for deposits with new-found vigour."

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