Money is still fungible, and banks are not nonprofits


James Deitrick and Michael Granof have a modest proposal: they want to make banks account for the use of their TARP and TARP II funds in the same way that nonprofits must account for their funds -- that is, by grouping funds according to how they are used. But this proposal is either much less interesting or much more radical than its authors suggest. They write:

Executives of banks that have received TARP cash have said that it is too hard to account separately for how they spend their federal dollars. Money is fungible, they argue, and therefore they cannot readily distinguish between outlays of their own resources and those provided by the government. But that's the type of doublespeak that would get the head of a town's homeless shelter thrown in jail. If bankers are unable to segregate cash by source and specifically account for expenditures, why are they in charge of banks in the first place?

The answer is that the banks in question are profit-maximizing enterprises, and homeless shelters are not. Bank managers have a fiduciary duty to maximize shareholder value. Deitrick and Granof might think that bank managers are doing a bad job of maximizing shareholder value -- presumably by spending too much time wallowing in money on their new corporate jets -- but that's an argument in favor of making them more accountable to their shareholders, not additionally accountable to the government.

The Deitrick and Granof proposal has two options. First, the government could keep the banks the same and demand that they use TARP money for making loans -- in which case banks could just use standard accounting alchemy to transfer an equivalent amount of other funds out of their loan-making enterprises and into bonuses and jet. (Think of it this way: If I gave you a gift card for a store you patronized every week, the total amount of money you spent at the store would not necessarily go up. You might simply reallocate elsewhere the money that didn't come in the form of the gift card.)

The authors acknowledge this persistent "opportunit[y] for mischief," but it seems more like common sense. The point about the fungibility of money isn't that it's impossible to distinguish between the origins and uses of particular funds; it's that there's no point. One dollar is just as useful as another.

The second option is to change the structure of the banks -- that is, to make them something other than profit-maximizing enterprises. That might work. But I think it's a more ambitious project than what the authors have in mind.

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Conor Clarke is the editor, with Michael Kinsley, of Creative Capitalism. He was previously a fellow at The Atlantic and an editor at The Guardian. More

Conor Clarke is the editor, with Michael Kinsley, of Creative Capitalism, an economics blog that was recently published in book form by Simon and Schuster. He was previously a fellow at The Atlantic and an editor at The Guardian. He is also on Twitter.
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