Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

But achieving scale raised the question of funding. Investment banks don’t have deposits. They borrow the money they lend on wholesale markets from other banks or institutional funds. In the aftermath of the inflation and interest rate shocks of the late 1970s and early 1980s, this put them in a sweet spot. If investment banks didn’t have depositors, that suited savers, who, in the wake of the inflation, no longer wanted to put their money in bank deposits either. They opted instead for money market mutual funds (MMF), that characteristic financial institution of the new age.29 These were highly attractive to affluent households looking for better rates than those on offer from bank deposits. The money market mutual funds offered instantly accessible accounts without official government guarantee, but pledged by their private sector operators to return at least a dollar on the dollar plus an attractive rate of interest on top. Bypassing the bankrupt savings and loans and the struggling commercial banks, cash deposits flowed into huge pools of professionally managed cash looking for good yields on Wall Street.