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Fixing the money markets is more important than any bail-out

Analysts at JPMorgan suggest that prime money market funds, which had $2 trillion of assets under management in early September and are a leading provider of short-term liquidity to the banking system, suffered between $350 billion and $400 billion of redemptions after the Prime Reserve fund broke the buck following losses on its $385 million holdings of Lehman commercial paper.

Other funds also might have broken the buck in the week beginning September 15 had not their parents injected cash.

At the surviving prime money market funds, these vast redemptions have eaten into the substantial cash cushions – between 10% and 20% of assets under management – all must hold to meet forecast investor calls for their cash back.

These funds must now sell good-quality assets to rebuild cash levels. They are selling some of their longer-maturity holdings to do this, shortening their funds’ average maturities and further reducing supply of one-month and particularly three-month money which banks roll over to fund loans and build assets.

Amid all the sound and fury generated by the troubled asset recovery programme (Tarp), policymakers’ speedy efforts to restore order to the short-term money markets have been rather overlooked.