Talk of recession is nothing new in 2008. Most financial publications have been talking about this since early 2007 (if not mid 2006), so it’s no big secret that a confluence of negative forces conspire to wreak havoc on the US economy. But this is the first time that Ben Bernanke sounds worried.
A recession may drag down the stock market at the same time that the housing market is in its worst slump in decades. So stocks and real estate may take big hits. Money markets are still safe, right? Maybe not.
There’s been a lot of debate recently about money market funds and whether they risk exposure to the subprime collapse. Most experts have said that normal investors have nothing to worry about and that these funds — really mutual funds made of bank CDs, Treasury bonds, corporate debt, etc — are solid. The not-so fine print on any of these funds say that unlike savings accounts, money markets are not FDIC insured (though some of their holdings, such as bank loans, are insured.) The $1 price per share can theoretically fluctuate.
In practice, this has never happened. CBS reports that in the history of money market funds, $1 peg was reduced only once, and only to $.96. This was during the 1994 derivatives crisis, which most experts believe was far more expansive than our current financial crisis.
But how safe are money markets? The answer is that most are still very, very safe. But it depends on the type of fund you’re in, the kind of investments the fund holds, and finally on the size of the company managing the fund.