|
The
Money Market
|
The Money Market
by Marcia Stigum is the definitive book on a not widely known aspect of
our monetary system. An introductory description given here
consists
mainly of excerpts from the 3rd edition, published in 1990 by McGraw
Hill.
The U.S. money market is a huge and major part of the
nation's financial
system in which banks and other participants trade hundreds of billions
of dollars every working day. It is a wholesale market for
low-risk,
highly liquid, short-term debt instruments. They include short
term
U.S. Treasury and federal agency debt, negotiable bank CDs, bank
deposit
notes, bankers' acceptances, short-term participations in bank loans,
municipal
notes, commercial paper, Federal funds, and Eurodollars.
The heart of the money market is in the trading rooms of
dealers and
brokers. In truth it is not one market but several markets for
distinct
and different instruments which nevertheless have close
interrelationships.
A notable feature is the speed of transactions involving hundred
million
dollar blocks and the trust that exists among the traders. Trades
are negotiated by phone or computer terminal within seconds and no one
reneges. The motto is: my word is my bond.
Borrowers in the market include domestic and foreign
banks, the Treasury,
corporations of all types, the Federal Home Loan Banks and other
federal
agencies, dealers in money market instruments, and many states and
municipalities.
The lenders include most of the above plus insurance companies, pension
funds, and various other financial institutions.
The money market accomplishes several vital
functions. One is
shifting vast sums of money between banks. This is required
because
most large banks need more funds than they obtain in deposits, whereas
many smaller banks have more deposits than they can profitably use
internally.
The money market also provides a means by which funds of cash-rich
corporations
and other institutions can be funneled to banks that need short-term
money.
The money market is where the U.S. Treasury can sell
huge quantities
of debt with ease. It is also where the Fed carries out its open
market operations to control interest rates and provide for growth of
the
money supply. The market is where participants determine the term
structure of short term interest rates affecting the yields on Treasury
bills and commercial paper of different maturities. It has also
become
an international short-term capital market where much of the dollar
denominated
trade by foreign entities is financed.
For details about market participants, instruments, and
trading methods
in the money market, Stigum's book is highly recommended.
Next
Article Home
|