Can Money Market Crash?

Question

Does the economy affect the money market? If the stock market crashes, does the money market go down dramatically?

I'm asking because I do not fully understand how the money market works. Thanks in advanced for your answers.

Answer 1

Technically yes it could, but pragmatically no it cannot. The closest thing since the Depression actually happened last Wednesday. Overnight loans spiked 1/2% with many banks unable to borrow money regardless of their collateral from other banks.

In theory, of course, it could crash. In the 1830's there was a brief period where interest rates hit 24% because the Bank of England cut off loans to the United States and to merchants doing business with the Americas. During the Great Depression banks would not extend credit to one another. It can happen and if it does happen, expect the stock market to nose dive, which of course it has.

The stock market cannot affect the money market, but the reverse is not true. Events in the money market will cascade through all other markets. The stock market is the residual market of all other things. If you have your food, savings, insurance, home and a car then you can set aside money in the stock market. So, any impact on the more important things of life impact the stock market strongly.

Answer 2

Plunge Protection Team in France, and the Untied States wont let the markets crash its called the visable hand of the central bank. Central Bank is there for that reason alone as lender of last resort. True if banks tightin up money, and stop lending a depression can occur, but lesson of 1929 have been learned. Benarke wrote the paper on why the great depression occured, and Freidmann did too it was from tighting money in slower economic times that created the great depression in the 1930s, and not getting off the gold standard.

Answer 3

When you say "safe", I guess you mean return of money as apposed to being a good investment. Technically, those accounts are not insured and without extraordinary government moves, the accounts could lose value in a crisis. During the 2008 crisis, the government stepped in to guarantee money markets to prevent a run that they feared could spread to the rest of the economy. Currently many of the same people (Bernanke, Geitner, Blair) are still involved in these decisions so I'd guess that they would act to maintain the funds. NO GUARANTEES If congress goes more conservative IMO, it would be good overall, but reduce chances of an emergency bailout like last time.

Answer 4

You might mean money market funds....or the currency market. The answer is likely different between the two. A little clarification will help folks answer you.