John Bogle, founder of the Vanguard Group [profile], said it is risky not to adopt the proposal by SEC Chairman Mary Schapiro to regulate the money market industry.

AP interviewed Bogle from the Bogle Financial Markets Research Center.

Asked to react on the statement issued by Vanguard saying the proposal "would have eliminated an important savings tool," Bogle said:

That’s their guess, and they may know more about it than I do. But I don’t see why. Investors are relying on this illusion that the asset value is fixed. We ought to do away with the illusion. I know this would be painful for the money market industry to move to a floating NAV, but it would not eliminate the industry. That’s absurd. I don’t think enough people are standing back and saying, “What’s the reality here?”

AP asked if tighter restrictions would make matters worse for the money market industry. Bogle thinks:

The industry isn’t providing a competitive return now, but that will change over time. If there is a floating net asset value, people will understand that asset values do float, if only a tiny bit. And if a company runs a money fund very conservatively, you can still keep the asset value stable every day of the year.

But there’s always the chance of something going wrong in this technology-driven system. After what happened in 2008, we now know that there’s an immediate contagion if something happens to a money-market fund. Even though only one of the funds gets pneumonia, every money fund gets a cold.

 

Edited by: HFD


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