Traders work on the floor of the New York Stock Exchange shortly after the opening bell in the Manhattan borough of New York April 2, 2014.

(James Saft is a Reuters columnist. The opinions expressed are his own)

By James Saft

n>(Reuters) — It is time for money market funds and their investors to grow up and accept that investments are worth what they will fetch.

Any policy other than allowing all money market funds to fluctuate in value, as they surely do anyway, rather than adopting the protective coloring of an artificial $1.00 share price is a huge mistake and a disservice to investors and taxpayers alike.

New money market regulations reported to be under consideration by the Securities and Exchange Commission may give broad exemptions to money market funds which would otherwise be forced to abandon a stable $1 share price, long an industry standard.

While money market funds for institutional investors are widely expected to be forced to float their share prices, like any other mutual fund, a broad swathe of funds classified as retail are lobbying to be able to keep stable value accounting, while potentially adopting other safeguards against ‘runs’ such as the ability to temporarily suspend or limit redemptions during times of stress.

The regulatory change traces its origin to the financial crisis when the well-known Reserve Fund, having invested in Lehman Brothers debt, broke the buck, sparking a run on redemptions, mostly institutional, on a range of money market funds. The run only abated once the Federal Reserve and Treasury pledged to provide temporary support to the funds.

Supporters of a retail exemption argue, among other points, that it is primarily institutions which caused the problem last time and present a threat. As someone who witnessed savers lining up on the streets outside Northern Rock branches in London in 2007 to withdraw their money, this seems simply silly. While retail investors in money funds have less capacity to deal crippling blows individually, changes in technology, particularly communication, and risk awareness mean they will potentially be more volatile in the next crisis.

Even if they are not, the stable dollar share price as a feature is deeply flawed on two levels.

First, it creates a risk for taxpayers and regulators without a commensurate reward, other than private gain for those who sell them.

Second, it encourages investors to fail to take responsibility for their investments, which in turn encourages the borrowers which benefit from this fecklessness to be feckless themselves.

THINGS ARE WORTH WHAT THEY WILL FETCH

Pricing money market shares at a dollar and paying a bit of interest on top is essentially a brilliant marketing move, rather than an arrangement of convenience or convention. By keeping shares stable at a dollar, money market investments take on the protective coloring of insured bank accounts. We are all familiar with the phenomenon of protective coloring, under which something in nature, like an insect, develops a color, red for example, which fools potential predators into thinking it may be nasty and poisonous like so many other red-colored things.

Except in this case, rather than a predator fearing a stomach upset we have an investor with extremely incomplete information who is encouraged by the dollar level to believe that money market funds share something in common with insured bank accounts which they do not: insurance. To be sure, all risks are disclosed but the psychological effect is important.

That’s a free ride for the money market fund industry, which attracts funds which it otherwise might not at rates of interest which it otherwise might have to raise.

Arguments that if net asset values (NAVs) fluctuated it might raise the cost to state and local government issuers which sell short-term debt to money market funds don’t hold water. In fact, I’d make exactly the opposite case. A subsidy based on the illusion of greater safety, which is what this is, is an invitation to mal-investment.

Riskier debt backing riskier ventures, even if the difference is minimal, is supposed to bear a higher interest rate not just to compensate investors but to send a signal to borrowers about their plans.

For investors, this is simply a case in which they need to understand the risks they are bearing, which are usually very small, and accept responsibility for them. If they want an insured bank deposit which can never ‘lose’ money, well go and get one. (I’d also point out that anyone who understands the concept of inflation should find the idea that money doesn’t lose value in a bank or other low-yielding account laughable).

If you want a convenient, liquid, low-risk place to park money which pays a bit more, potentially, but which carries a bit of extra risk, then go to a money market fund.

But understand that what goes in doesn’t have to be there to come out.

The suppression of risk signals from market to investor is exactly what breeds financial crises. Let’s cross this one off the list.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at jamessaft@jamessaft.com and find more columns at blogs.reuters.com/james-saft )