BORROWING FOR A DAY AND LENDING FOR YEARS (COMMENT).

BORROWING FOR A DAY AND LENDING FOR YEARS (COMMENT). Nick asked me here: “So to sum up, Bernanke is using an old idea, and you agree that it’s the right move?” I had posted last August that Walter Bagehot should be the guide in a liquidity crisis: the Federal Reserve Bank should lend money (cash) as a lender of last resort. Kids, banks are always subject to runs because they borrow for short periods of time and lend for long periods of time. You can draw on your checking account and the bank has to pay on demand. The bank counts on the fact that not everybody withdraws their money at once. If all the depositors “run” to the bank to withdraw their money, the bank can’t satisfy them. In 1907 my father’s parents were wiped out in a bank run. Now, there are other institutions that are not banks, referred to as a “shadow banking system”, who also borrow short and lend long. There was a run on Bear Stearns less than two weeks ago. Paul Krugman has a discussion which I urge you to read.
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