Was the September 2019 US Money Market Turmoil Due to Insufficient ‘Loanable Funds’?

This paper deals with the September 2019 money market turmoil in the United States. It criticizes the thesis that the rates rise was due to the lack of intervention by the four largest banks that did not have enough reserves to be lent to dealers. This thesis is based on the loanable funds theory. A thesis consistent with the theory of monetary base endogeneity is presented in which the lack of intervention by the four largest banks is motivated by the uncertainty on whether reserves would be needed to settle trades within the day, the unwillingness to borrow overnight from the Fed and the uncertainty on the evolution of money market rates at which the loans might have had to be refinanced. While regulation changes may have mattered in imposing liquidity constraints to major lenders these regulation changes were intentionally aimed at discouraging excessive borrowing and lending. The intervention by the central bank in restoring normal conditions however validates a structure of prices of financial assets that contributes to inequality and a flow of financing to investment funds whose strategies do not foster the capital development of the economy.