Short-term debt can help weed out struggling companies from financial markets by revealing their solvency risk. However, many financial firms choose too much short-term debt, leading to inefficiencies. Low-risk firms issue more short-term debt to save money, but this can cause problems as they don't consider the social costs of running out of cash. Additionally, creditors can't see firms' solvency risk, so they lower long-term interest rates too much when more short-term debt is issued. This makes firms lean even more towards short-term debt, creating further distortions in their funding choices.