Today the Mises Institute faculty provide excellent responses to Paul Krugman and his query re Austrian economics, MMMF, and financial intermediation.
But even legitimate intermediation can be a source for bad policy. Re MMMF and the past crisis see some interesting commentary by Garett Jones at
http://econlog.econlib.org/archives/2012/10/bailouts_are_fo.html
Some highlights:
During the worst days of 2008, something strange happened. During the Eight Days of Terror, the S&P 500 fell by 23% but there were no loud calls for the government to guarantee the value of stocks (Aside: TARP was signed into law on Day 3 of the 8).
By contrast, about two weeks beforehand, Treasury guaranteed the solvency of many money market mutual funds, the de facto bank accounts created by investment companies. Why the guarantee? Because of the panic induced by one money market mutual fund (MMMF) when it announced that its value had plummeted: Instead of being able to repay 100 cents on the dollar, the Reserve Fund would only be able to pay—-wait for it—ninety-seven cents.
Yes, the Reserve Fund was an historically important MMMF–it was the first. And surely its failure contained a signal about the health of the others. But three cents on the dollar? That set off a mad scramble for safety that spurred the Bush Treasury to create a new government guarantee?
No Paul, Austrians do not want to ban financial intermediation just bad or inappropriate policy responses which keep gains private but socialize losses.
Mises, in particular, was one of the best at clearly differentiating intermediation from credit creation.
