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Runs on money market funds, gas were alike

09/29/2008

Both were panic reactions that only made the situation get worse

NASHVILLE, Tenn. - As anxiety on Wall Street led banks and other investors to hoard cash last week, a different kind of market fear gripped cities across the Southeast.

A hurricane-related disruption in gasoline supplies prompted jittery drivers from Atlanta to Nashville to top off their fuel tanks more than usual, causing sporadic shortages and temporary shutdowns of stations. These closures only magnified the problem, of course, leading to more shortages, which sent local prices skyrocketing.

"It's a wonder people didn't go out and empty all of the grocery store shelves, too," said Larry Lamb, of Nashville. "All you need to do when something like this happens is just calm down."

Perhaps — in hindsight — that is the sensible thing to do.

But economists and other experts say individuals — not just Americans — are hard-wired to respond quickly when they are scared, and in a way that is not always in their own, or their neighbors', best interests.

Dennis Jacobe, chief economist for Gallup Inc., said an emotional response is quite normal when expectations — such as gas being available or the safety of a money-market fund — suddenly are called into question.

"When those basic assumptions of your daily life are violated, it sends you a shock and you do get emotional, irrational reactions," Jacobe said. "That means panic."

Lars Perner, an assistant professor of clinical marketing at the University of Southern California, said the combination of worries about the economy and gasoline supplies may have exacerbated motorists' reactions.

"Once you get into that kind of negative thinking, you often have a vicious cycle going on," Perner said. "You get into sort of a protective instinct that comes out — and you go and fill up."

This protective instinct is what drove pension funds, corporations and other institutional investors to make large-scale withdrawals from U.S. money-market mutual funds earlier this month, jeopardizing the nearly $3.4 trillion industry — until the government stepped in to prop it up.

That run was prompted after Reserve Primary Fund, the nation's oldest money-market fund, suffered a setback that had occurred just once before in the industry's nearly four-decades-long history: Its underlying assets fell to 97 cents for each investor dollar put in, a phenomenon the industry calls "breaking the buck."

Peter Rizzo, senior director at ratings firm Standard & Poor's, said many of the money funds hit by a rush of redemptions had investments tied to financial sector firms that had far healthier balance sheets than Lehman Brothers and other fallen financial firms. But investors pulled out from the funds anyway, he said.

"What made things worse was people panicking and pulling out money quickly, and forcing fund managers to sell quickly at losses," Rizzo said.

"If you yell 'fire' in a theater," he added, "people will run."

Authorities promised to be vigilant for price gouging during the gas shortage, but costs still shot up by an average of about 50 cents in a matter of days to more than $4 per gallon around Nashville and Atlanta. The current national average is about $3.68, according to the AAA auto club.

The runs on gasoline and money-market funds aren't the only recent examples of fear-induced economic behavior.

The U.S. Mint was forced last week to suspend sales of its popular American Buffalo 24-karat gold coins because it couldn't keep up with investors' soaring demand for commodities and other asset classes deemed to be safe.

And earlier this year, customers stockpiled imported Thai jasmine, Indian basmati and long grain white rice in response to soaring prices. That caused the country's two biggest warehouse chains, which cater heavily to small businesses like restaurants, to impose limits on bulk purchases.

The move was criticized by officials in Thailand, the world's No. 1 rice exporter, as having more to do with panic than any supply shortages.

Although the fuel situation has eased somewhat, the short supply in the Southeast continued into the weekend despite rising fuel production at refineries that had been shut down by hurricanes Gustav and Ike, and government officials' attempts to assure drivers that there is enough gasoline for everyone — just not enough for everyone to be riding on a full tank at all times.

"People are freaking out," said landscaper Dennis McDonald, 50, after waiting to pump 10 gallons of gas into his pickup in Woodstock, Ga.

Robert Prechter, a market forecaster and president of The Socionomics Institute in Gainesville, Ga., said in an e-mail that the response in Nashville and other cities to even temporary shortages of gasoline should have been expected.

"Topping off is simply a rational reaction to disrupted supplies," he said. "So it is incorrect to charge everyday people with thoughtless herding in this case."

Associated Press, MSNBC, September 28, 2008, http://www.msnbc.msn.com/id/26930393/