For the first year since 2001, investors moved back into money market mutual funds in 2005, with net sales of $127 billion. (See: Federal Reserve flow of funds account F206.)

The largest flows into money market funds came from U.S. households ($47.7 billion) and funding corporations ($58.4 billion).

The return of investors to money market funds was clearly the result of the Federal Reserve policy of increasing short-term interest rates, combined with the flattening of the yield curve due to buying pressure on longer-term fixed income securities resulting from the trade deficit.

Investment by funding corporations picked up in the last quarter of 2005 to an annual rate of $168.6 billion. Much of the money of funding corporations is connected to cash collateral held on short-sales of securities.

Presumably, collateral put up by speculators against long-bonds (gambling that long-bond prices would fall) was being channeled through funding corporations into money market funds, thereby helping to keep short-term rates down.

(See: “Just What Are Funding Corporations?“)


Total mortgage borrowing fell 6.6% during Q4 2005, compared to the previous quarter, according to Federal Reserve flow of funds table F217.

Mortgage borrowing by households fell even more, down 11.7% compared to Q3 2005.

Two-thirds of mortgage financing came from agencies (e.g., Fannie Mae) and issuers of asset-backed securities.

The rapid withdrawal of borrowers from the home mortgage market, as interest rates rose in Q4 2005, suggests that much of the borrowing over the last year or so was probably opportunistic, stimulated by low interest rates and aggressive marketing (e.g.,


One of the most entrenched principles of securities market supervision is ‘non-merit regulation’ — a guiding light of the Securities and Exchange Commission since its founding in 1934.

The idea behind ‘non-merit regulation’ is that the SEC should focus efforts on getting issuers and intermediaries to provide disclosure of material facts about securities being marketed and traded, leaving it to investors to decide whether a security is a good investment or not.

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