Money-Market Funds, Stablecoins and the S&L Crisis
Lightly regulated new financial instruments can have serious consequences if lawmakers and regulators aren’t careful.
Genius Act it institutionalized cryptocurrencies in the U.S. by creating the first comprehensive regulations for stablecoins.
When Washington lets new financial products on the scene, they aren’t adequately regulated and quickly gain an advantage over existing financial instruments that are more heavily policed. Market convulsions, economic downturns and bank failures follow.
I watched it happen when money-market funds burst into the market in the 1980s, bringing banks to the brink of insolvency. Stablecoins could do the same thing.
While the government had long ago capped the interest banks could pay depositors at 5.25%, money-market funds could offer whatever the market demanded.
When interest rates and inflation hit double digits, depositors rightfully shunned banks to earn 12% in a money-market fund.
While the Genius Act prohibits stablecoin issuers from paying interest, it doesn’t explicitly stop crypto exchanges and other intermediaries from doing so.
Between 1979 and 1989, money-market funds grew more than 20-fold, sucking deposits out of the banking system which would have otherwise been converted into loans for homes, cars and businesses.
At the Office of the Comptroller of the Currency in 1979, I drafted portions of the law that would eventually become the compromise the banks needed.
Exactly a year later, when I became general counsel of the Federal Home Loan Bank Board and the Federal Savings and Loan Insurance Corp., my first task was to help implement this new act.
Some banks could adapt to the dramatic increase in interest they had to pay depositors because business loans were typically short-term with interest rates adjusting according to market conditions.
But the regulatory change immediately locked savings and loans into a death spiral. They had no option but to borrow short by paying depositors interest of about 12% and lending long through 30-year fixed-rate home loans.
That created an average negative spread of about 5% between what S&Ls earned on their mortgage portfolios and what they paid depositors.
About 1,400 S&Ls collapsed over the next decade, as did the U.S. housing market, which relied almost entirely on S&Ls to finance mortgage loans.
Some 1,600 commercial banks would also fail as the country settled into a deep recession.
As regulators, we made mistakes in the 1980s, and unfortunately the same mistakes are being made again.
Thomas P. Vartanian Wall Street Journal Sept. 15, 2025
https://www.wsj.com/opinion/stablecoins-money-market-funds-and-the-s-l-crisis-d1fe6af5
Kommentarer