WHEN PEOPLE BORROW SHORT AND LEND LONG (KIDS, PLEASE READ).

WHEN PEOPLE BORROW SHORT AND LEND LONG (KIDS, PLEASE READ). Kids, it will have occurred to you that people face the kind of problems that the failed investment banks Bear Stearns and Lehman Brothers faced. Take, for example, people trying to pay for a house or car or save for college (long-term commitments) and pay for groceries and gasoline (short-term demands). Or take retirees trying to invest to make savings last over the remainder of a lifetime. People are advised to keep cash or liquid assets to meet sudden demands for cash. Bank accounts and savings accounts provide a reserve for people just as cash or liquid reserves do for a bank. The investment banks relied on short-term borrowing that had always been available in the market—until it wasn’t. Credit cards serve that purpose for many people. So do pawn shops and home equity lines of credit. What happens when the cushion is gone and the short-term credit isn’t enough? At that point, people, like investment banks, have to sell assets, even at a loss, to raise cash.

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One Response to WHEN PEOPLE BORROW SHORT AND LEND LONG (KIDS, PLEASE READ).

  1. Pingback: A typical week in the P.S.A (Ponzi States of America) | Crossing the Rubicon

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