BORROWING SHORT AND LENDING LONG–REVISITED (KIDS, PLEASE READ).

BORROWING SHORT AND LENDING LONG—REVISITED (KIDS, PLEASE READ). Kids, I am writing today’s posts because they apply to people too, as I will explain tomorrow. Six months ago I posted here about the problems that a bank has if there is a run on the bank, with short term lenders refusing to lend to the bank or demanding their deposits back. At the time Bear Stearns had been unable to withstand such a run. Next, it turned out that another major investment bank, Lehman Brothers, and a major insurance company were unable to deal with a run. And then there were others. Traditionally banks have held a percentage of their assets in liquid assets, as a cushion against a run. Meyer Burstein defined in MONEY defined liquid assets as “assets which can be converted with little expense at short notice into means of payment.” If you have borrowed short to lend long, and there is a run, and you don’t have enough liquid assets, you may never get the chance to hold on long enough to benefit from your long-term assets. You will either have to sell some long-term assets at a loss or find another investor or go bankrupt.