Follow the money: Apple vs. the FBI
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The central business problem for retail banks is how to earn more from deposits than they pay in interest, and to do so at a scale of billions of dollars. Apple also needs to figure out how to make money from its pile of cash. Accepting deposits and becoming a bank would only make that problem worse - so how is "having lots of cash" evidence that Apple wants to be a bank?
An investment bank is a different animal and I would strongly disagree with the author that Apple is a "de facto investment bank". Investment banks advise clients on financial transactions and help clients hedge risk (something Apple doesn't do).
There are much more straightforward and compelling explanations for why Apple cares about security (as others in this thread have pointed out).
The only thing I would slightly agree with is that Apple maybe has an eye toward building its own payments network (a payments network is NOT a bank, by the way). But Apple isn't even CLOSE to competing with Visa and MasterCard in that regard - even if it did disintermediate the credit card companies it would have to have much much larger consumer adoption of Apple Pay plus a merchant network.
Honestly the tone and muddled structure of this article come off as a poorly substantiated conspiracy theory.
He's also a member here, and sometimes comments.
http://www.amazon.co.uk/Charles-Stross/e/B001H6IW0Q/ref=sr_t...
http://www.amazon.com/Charles-Stross/e/B001H6IW0Q/ref=sr_tc_...
I read entirely too much HN.
There are also pieces by those famous that are less arguments, and more calls to action, in which the person't fame, or reputation, helps push the message, and as such it can be factored in as part of the message. It becomes useful for assessing how widespread the reach of the message will be. E.g. Brad Pitt speaking our against a social injustice vs Kim Kardashian commenting on fiscal policy. In one the fame helps spread the message (even if it doesn't, or at least shouldn't change the merits of the message itself), in the other the fame is irrelevant.
For Stross, he's a fairly famous hard Science Fiction author, he's commented on the future and fiscal issues before, and has written books regarding interstellar money systems (haven't read yet) and possible problems with them. His fame in this area makes me want to see what he has to say, we'll see if I agree after I finish reading it...
Basically he got tired of reporters asking his opinion--on everything. It was right after Superman. He said in a tired voice, "Why are you asking for my opinion? Why us actors? Why not the Janitor down the hall. Guess what--that Janitor probally knows more? We read lines other people wrote?"
The reporter walked away, like Superman didn't save the day?
It would explain why this jibberish is #1 on HN.
http://crookedtimber.org/2009/01/27/stross-on-development-ec...
They mostly make their money on huge corporate loans, investing and housing market.
From a bank's perspective savings accounts are money they borrow, while mortgages and corporate loans are money they lend out.
A bank can make money on a savings account via fees and the like, and having a large base of savings can provide massive political cover, but in the idealized system bank accounts were always a way of raising money and so a cost center not a profit center. The interest rate being low is a good thing from their perspective it means the cost of acquiring working capital is lower than when they have to pay out more.
The big banks are considered too big to fail and so they more less have a get out of jail card to gear their risk. The money they can make from personal savings accounts are absurdly insignificant compared to these other areas.
Isn't Fractional Reserve Banking where banks are required to keep a portion of the deposits available as a reserve in case their investments go bad? How is that governments subsidizing them? Without fractional reserve, banks would be free to lend out as much of your deposited money as they thought they could get away with.
Edit: Ah, from reading some more it appears it's different in a few very important details, even if the structure is the same. The Banks are only allowed to lend a certain multiple of the cash reserves they have on hand, not a certain fraction. That is, reserve deposits are a fraction of lending, not vice-versa. I'm still not sure how that's governments subsidizing them though. Without the restriction on lending, I could see banks getting a little wild in the boom economies (which happened in the mid to late 2000s).
Where does the rest of the money that's lent out come from? If you deposit $100 and the bank can, based on that deposit, lend out $1000 (assuming a 10% reserve requirement, which is fairly typical), where does the other $900 come from?
[Edit: this is somewhat misstated, see subthread under jonas21's response.]
If you had a banking system with no government backstop you could still have fractional reserve banking but all the players in the system would bear the counterparty risks. The bank could claim you $500 in it but in reality you'd have a contingent interest in the assets of the bank.
Money markets worked this way until the USG decided to reward the gamblers by treating them identically to the more prudent.
A bank lending out more money than it actually has on deposit is not just "making promises"; it's "making promises they know they can't keep". Yes, banks did get away with that before the government got into the business of printing money, but it was riskier for them, which is why they prefer to have the government do it--in other words, instead of taking on the risk themselves of printing money not backed by deposits, they prefer to have the government print the money and give it to them to lend. See my response to sbov upthread.
The "backstop" is certainly a factor, of course--it's what prevents ordinary bank runs from happening. But, as I noted in my response to sbov upthread, that certainly doesn't eliminate financial panics; it just exchanges one failure mode for another (arguably worse) one.
* If you had a banking system with no government backstop you could still have fractional reserve banking but all the players in the system would bear the counterparty risks. The bank could claim you $500 in it but in reality you'd have a contingent interest in the assets of the bank.*
Well, I suppose this is true in a technical sense, but the fact is that practically nobody, in the days when banks did this (i.e., before governments started printing the money), understood that this was what was happening. Again, see my response to sbov upthread.
> Money markets worked this way until the USG decided to reward the gamblers by treating them identically to the more prudent.
I certainly agree that USG's actions have not helped; but "banking" is a much broader category than "money markets", and fractional reserve banking is centuries old. And, as I noted above, practically nobody who deposited money in a bank or borrowed money from one realized what was actually going on; they thought that the bank being "reputable" meant it only lent money it actually had. When people did realize what was actually going on, they started a bank run.
If that's the case, how do they keep fulfilling those promises? Not fulfilling the promised is the exception, not the norm. You should check your assumptions when they don't align with reality.
If you believe any lending when you don't have the full money on hand to account for all the loans is wrong, then you need to apply the same level of scrutiny to borrowing. Borrowing money to do something you didn't have the money to do initially would be just as wrong. The system works because both sides are taking on risk. The borrower's risk (and the risk of everyone using the money( is spread throughout the entire system though.
By having the government magically conjure new money into existence, and getting everybody to believe that that counts as "fulfilling the promise". And then having to wave their hands and obfuscate when the economy melts down.
> If you believe any lending when you don't have the full money on hand to account for all the loans is wrong, then you need to apply the same level of scrutiny to borrowing.
What counts as "the same level of scrutiny"? The analogue from the borrower's side would be borrowing money without any intention of paying it back, not borrowing money period. If the borrower takes the money, does something profitable with it, and pays back the loan with interest out of the profits, there's nothing wrong with that; indeed, it's why borrowing exists in the first place: because it's a positive sum transaction, benefiting both sides.
> The system works because both sides are taking on risk.
A system in which loans were always backed by real wealth would have this property; the lender takes the risk that the borrower won't pay the loan back in full, with interest, and the borrower takes the risk that his business venture won't pan out and he'll have to either find some other way to pay back the loan, with interest, or default and take the penalty for that. But both sides also have the possibility of gain to balance the risk.
But our current system forces third parties--the taxpayers--to also take on risk: the risk of having to bail everyone out when the house of cards collapses and the economy melts down. What gain do the taxpayers get in exchange?
Overall economic growth. If you believe that a system where only real assets could be used to back a loan, and loans needed to be backed 100% by real assets would result in the same or better overall situation now if started some point in the distant past, then yes, we should strive for that. Personally I believe that the current system has allowed advancement farther and faster than the alternative. Sometimes progress is best achieved not through the safest route, but through the fastest of the routes with the acceptable safety margins, given a cost/benefit analysis. That's the system we live in. We don't always agree on the metrics of the cost benefit analysis, or what constitutes a good safety margin, but even the safest path forward we have is not guaranteed (recessions and depressions can still happen, regardless).
Thank you very much! You have actually come out and said what even Nobel-Prize-winning economists are unwilling to say.
Here is the argument you are making, in a nutshell: if we limited ourselves to a "hard money" system with no fractional reserve banking, economic growth would be too slow. So in order to get faster economic growth, we allow fiat money and fractional-reserve banking; but we also have to accept the downside of that, which is occasional economic meltdowns and a general skew in the way wealth is distributed. This is a fair tradeoff because the benefits of faster economic growth outweigh the costs of economic instability and skewed wealth distribution.
Whether or not I agree with this argument is really beside the point (I don't think I do, on balance, but it's certainly not a slam dunk either way so I can understand that reasonable people could take either side). The point is that we, the taxpayers, were not sold the system we have on the basis of this argument. We were sold the system we have on the basis of "it will make sure no Great Depression ever happens again--trust us!" We have never had a real public debate on whether it really is a fair tradeoff to accept economic instability and skewed wealth distribution in exchange for faster economic growth. (I personally think that is because the parties that benefit from the existing system, mainly politicians and banks, are afraid that a real public debate would result in a majority of people rejecting the existing system and demanding a different one, one that would be harder for the existing players to game. But the only way to know for sure is to have the debate.)
I didn't think it was that controversial. I'm not aware of any economists that wouldn't endorse a system such as that (even if they disagree whether we are currently acting within the constraints as they think they should be), unless they are forced to also be politicians (such as the Fed chair).
> Here is the argument you are making...
Yes, except I don't think that's as much a facet of FRB as much as Fed lending. FRB can exist with just deposits, and FRB rules are to keep banks from getting too leveraged. FRB can happen with an entirely commercial backer to the bank, so I I think FRB is a red-herring. At this point we are just talking about central bank lending (which could happen without FRB, as well). I will concede that the importance of FRB is greatly influenced by the ability of Fed lending.
> Whether or not I agree with this argument is really beside the point (I don't think I do, on balance, but it's certainly not a slam dunk either way so I can understand that reasonable people could take either side).
Definitely. I would be willing to revise my view of it with more information. I'm far from authoritative on the subject. My knowledge comes mostly from discussions here, common sense, Planet Money, Freakonomics, and some other random sources, in roughly that order.
> We have never had a real public debate on whether it really is a fair tradeoff to accept economic instability and skewed wealth distribution in exchange for faster economic growth.
That may be framing it a bit strongly. I'm not sure that requiring real assets to back loans leads to more stability. One of the selling points of Fed lending is that it provides a lever to control (or at least influence) the economy. If you believe that enough that you think the influence matters, it's a question of what has a stronger influence or more likely, under what constraints does that influence outweigh the runaway situations (that might be exacerbated by FRB) it's meant to counteract.
> But the only way to know for sure is to have the debate.
Well, I'm all for the debate. :) I don't necessarily think the public would go one way or the other by themselves. The topic is complex enough, with enough moving parts, that I think the majority could easily be swayed by their politicians of choice and the view they espouse.
I don't doubt that our current economic system is purely hovering semi-close to a local maximum. We could probably find much better systems with the ability to perform meaningful tests. Unfortunately, meaningful tests are hard because it's hard to simulate real, encompassing behavior of people in a test. I'm also not sure that a superior system wouldn't die off purely due to the inertia of the current system. All things being equal, a better system might win, but things aren't equal, the current system has a lot of leverage to bring to bear.
True; and so can the economic instability that comes with the possibility of bank runs. Also, the argument that that possibility is worth accepting in exchange for greater economic growth can be made with FRB alone; Fed lending is not required. (Fed lending might make the argument easier to make, since it comes along with the government guaranteeing bank deposits, so that an ordinary bank run basically can't happen in our current system. Instead we just get occasional meltdowns of the entire economy; but it's easier to shift the blame for that.)
> I'm not sure that requiring real assets to back loans leads to more stability.
I certainly don't have a proof that it does--I don't think economics is anywhere near developed enough as a science to be able to produce such a proof. But there is an obvious heuristic argument: requiring real assets to back loans ensures that whatever the borrower does with the loan, it must provide enough benefit (on average--obviously there's always risk involved in individual cases, but that's true of any economic venture) to make him willing to bid away those real assets from whoever else wants to use them. In other words, it uses the price mechanism for the purpose intended: to channel real resources to their highest valued uses. But as soon as you allow loans to be made without real assets backing them, you break that mechanism, and at that point, all bets are off.
> If you believe that enough
I don't--not because the influence doesn't exist (clearly it does), but because nobody understands how the economy works well enough to make using that influence a net gain. We'd be better off if everyone admitted that nobody knows how to run the economy, and adjusted our expectations accordingly.
I think we have different metrics for what constitutes a meltdown. We haven't had another great depression, which is what I would consider a meltdown. We've had recessions, less than desirable economic growth over periods, but that's a far cry from a Grapes of Wrath dust bowl type situation.
> it must provide enough benefit (on average--obviously there's always risk involved in individual cases, but that's true of any economic venture) to make him willing to bid away those real assets from whoever else wants to use them.
That argument only works if you think the banks don't make their own assessment on the risk of individuals and whether they are even going to lend. If money was unlimited then that would be the case, but there's a cost to borrowing, and a cost to lending. In a well balanced system the costs of each are outweighed by the gains. As it is now, different people and different ventures get different rates because the risk is not the same. The Fed provides liquidity, which makes the market more efficient, and uses rates to simulate supply. The banks provide market pricing by assessing borrowers and additionally tweaking the interest rate up or down, further simulating supply.
> We'd be better off if everyone admitted that nobody knows how to run the economy, and adjusted our expectations accordingly.
We're driving in the fog. We have limited time to see the dangers and take action, but if we don't attempt to steer in any way, for all we know we'll just start going in circles. The clues that we're makign headway aren't always clear, but they do come occasionally. I would rather tweak the current method than abandon it entirely, as it seems to be working overall, even if not fairly (we're all gaining, just not at the same rate).
But we did have one, and it happened almost two decades after the Federal Reserve was put in place.
Also, I think the situation in 2008 qualifies as a "meltdown", even though it was not as severe as the Great Depression. It was just a meltdown in a reactor that had had some additional backup safety features put in place since the last one.
> That argument only works if you think the banks don't make their own assessment on the risk of individuals and whether they are even going to lend.
Of course banks are going to do that, but I don't see how that invalidates what I'm saying. In a banking system where there is no FRB and no fiat money, there is no way to expand the money supply at will to provide enough for everyone who wants a loan. So there will be more potential borrowers than there are real assets to lend to them. Obviously banks ultimately get to choose who they will lend to, but a key component of their decision is going to be what interest rate various borrowers are willing to pay. A rational bank will choose whichever set of borrowers will maximize its expected return, adjusted for risk, and the higher the rate a borrower is willing to pay, the more likely it is that that borrower will be in the set that maximizes the bank's expected return. See further comments below.
> As it is now, different people and different ventures get different rates because the risk is not the same.
Sure, and that would still be true in the hypothetical system I was describing; a borrower who was more risky would have to be willing to pay a higher interest rate. And a rational borrower would only be willing to do that if his expected return, adjusted for risk, was high enough to make it worth paying the higher rate. So there would be risk assessment being done on both sides. In other words, there would be a functioning price mechanism driven by supply and demand.
> The Fed provides liquidity, which makes the market more efficient, and uses rates to simulate supply. The banks provide market pricing by assessing borrowers and additionally tweaking the interest rate up or down, further simulating supply.
Yes--"simulating" supply. But why does supply have to be "simulated"? Because the usual price mechanism has been broken. In a market with a functioning price mechanism, nobody has to "simulate" anything.
> if we don't attempt to steer in any way, for all we know we'll just start going in circles
You're assuming that the entire economy has to be "steered" in a single direction. But an economy is not a monolith; it's billions of people each with their own needs and wants, trying to improve their condition through specialization and trade. Why does it have to be "steered"?
Since most of our money is digital nowadays, it would be even easier than in the past: the major banks could get together and just agree to tick up someone's account by X amount when another bank requests it. No government required.
Yes, because that's how our current system works. The government prints money whenever a bank wants to lend it out, regardless of whether additional wealth was created or not.
> Fractional reserve banking started before central banks
Sure, and in those past systems, individual banks printed money to lend out, regardless of whether additional wealth was created or not. But in our current system, only the government is allowed to do that. Not that that absolves the banks--see below.
> which people would accept as payment for goods and serviced because the bank was reputable.
Yes. But what does "reputable" mean? What people thought it meant, back in the days when banking was young, was that the bank only lent out wealth that some other depositor had put in. In other words, when you took out a loan from the bank, you believed you were borrowing actual wealth that someone else had made available, and you paid an extra fee (the interest on the loan) for the use of that wealth in some (hopefully) profitable enterprise. The bank, in turn, made a profit as a middleman or broker, hooking up people who had surplus wealth to invest with people who had business enterprises that needed wealth.
But then some banks got the bright idea that they could increase their profits by printing more notes than they actually had wealth on deposit, and relying on people's belief that they were "reputable" to get those notes accepted at par--i.e., at the same rate as if they were actually backed by real wealth. If we actually described things as they were, instead of using euphemisms like "fractional reserve banking", the proper name for this would be "fraud". But it also happens to work, as long as one doesn't call it by its right name. Although it does have the downside of creating periodic financial panics, whenever people actually figure out that there isn't enough wealth on deposit at the bank to back all of the notes in circulation, and then they start rushing to the bank to redeem their notes for actual wealth before everyone else does--in other words, a bank run. One of the reasons that banks prefer to have the government do the money printing is that it eliminates this failure mode (in exchange for other worse ones)--see below.
> Since most of our money is digital nowadays, it would be even easier than in the past: the major banks could get together and just agree to tick up someone's account by X amount when another bank requests it. No government required.
They "could" do that in the sense of it being physically possible, sure. But in fact they don't, because it's illegal. Instead, they got the government to create the Federal Reserve, which does the money printing and allows the banks to maintain plausible deniability. It also has the advantage that, unlike private banks, the government can force people to accept its notes as legal tender, which eliminates the possibility of a bank run in the usual sense (though it certainly does not eliminate financial panics and boom/bust cycles, as we are now all too aware). I'm certainly not saying the banks are blameless in all this; I'm just saying that their current method of transferring wealth to their own pockets requires the government as a middleman.
No they don't. Currency in circulation is but a fraction of the money supply.
>If we actually described things as they were, instead of using euphemisms like "fractional reserve banking", the proper name for this would be "fraud"
Only if you accept that any IOU (which is "backed" by nothing but a promise to repay) is "fraud".
>then they start rushing to the bank to redeem their notes for actual wealth before everyone else does--in other words, a bank run
During a bank run people are rushing to obtain notes from the bank, not redeem them. The bank then doesn't have enough cash to fulfill the redemption. You have it backwards.
>But in fact they don't, because it's illegal.
They do it everyday, in plain sight of MASSIVE amounts of regulation.
You are seriously confused about the banking system. Less time viewing conspiracy theories on YouTube, more time reading work by the people who design and use the system. Despite what your sources tell you, the system is transparent (albeit complicated).
You are interpreting "printing money" way too literally. See my other comments in parallel subthreads.
> Only if you accept that any IOU (which is "backed" by nothing but a promise to repay) is "fraud".
A bank doesn't give me an IOU when it gives me a loan; it gives me actual money. Nor does it give depositors IOUs; they can get actual money in exchange for their deposits any time.
> During a bank run people are rushing to obtain notes from the bank, not redeem them.
To obtain notes corresponding to the amount they had on deposit, yes.
> The bank then doesn't have enough cash to fulfill the redemption.
Aren't you contradicting yourself? You just said "redemption" had nothing to do with it.
> They do it everyday, in plain sight of MASSIVE amounts of regulation.
No, they do something that is equivalent to the government printing money, if you don't insist on a way too literal interpretation. See above.
What the banks do not do is create money outside the very precise rules set down by the regulations you refer to. They also don't create money that is not denominated in the government's fiat currency. So they don't do anything that is analogous to what private banks did before governments outlawed private currency.
Actual money is an IOU. From the gov't to the holder of the piece of paper. It used to say so on every bill: "Will pay to the bearer on demand".
Yes, "used to say", before the government decided it would no longer pay specie (gold) for currency notes. So money used to be an IOU of a sort, but it isn't now. (And even when specie payments were being made, there was never enough gold to back all the notes in circulation, so the IOUs weren't all valid anyway. They worked because people didn't treat them as IOUs; they treated them as a valuable commodity in their own right. So I don't think money ever really functioned as an IOU. Now, of course, we have no choice but to treat it as a valuable commodity in its own right.)
First of all, I didn't say redemption "has nothing to do with it". I did use the word redemption, but in a completely different context than you.
To reiterate: people are trying to obtain dollars in a bank run, not get rid of them. They're trying to exchange their bank IOUs (chequing accounts), which are worthless if the bank collapses, for FRB IOUs, which will still have value.
>A bank doesn't give me an IOU when it gives me a loan; it gives me actual money. Nor does it give depositors IOUs; they can get actual money in exchange for their deposits any time.
Umm, a chequing account with deposits is a bank liability (IOU). And you can't get money in exchange for your deposit at any time, account dependent. Your chequing account? Sure. That's why you receive a negative rate on it net of fees.
Again, you don't even seem to have a grasp of day-to-day personal banking. Follow the balance sheet transactions for a loan, watch how the assets and liabilities move around. If you can't even do that, why are you arguing about this stuff?
I didn't use the word in any context except quoting you. Anyway, it seems like the problem here is that you are using words according to the Humpty Dumpty principle: they mean whatever you want them to mean. I can't follow your shifting meanings, so I'll just bow out here.
Trust of whom? Who prints the money?
There is no difference in printing my own notes than the government printing theirs beyond the trust of the people that it's worth something. That's an intrinsic feature of fiat money. People can lose faith in government currency, there's numerous cases around the world of it happening before.
We aren't trading actual physical goods (gold, silver) or notes directly exchangeable for them any more, and haven't been for a long while.
Not in our current system. Only the government can issue notes; for anyone else to do so is illegal. That was my point.
(It's true that, in our current system, most money creation is actually electronic--entries in accounting databases--rather than physical notes. But all of that money creation is still done under rules set down by the government, and denominated in the government's fiat currency. So it's equivalent, for my purposes here, to the government printing notes directly. And nobody can just decide to create, say, a new bank deposit any time they want, or denominate it in their own currency.)
> There is no difference in printing my own notes than the government printing theirs beyond the trust of the people that it's worth something.
In principle this is, of course, true. But I wasn't arguing that our current system is the only possible fiat money system with fractional reserve banking. I was only arguing that, in our current system as it exists, the government is in fact the only entity allowed to print money (with the qualifications I gave above).
In other words, the original source of the rest of the money is the government. Yes, that is exactly the point I was trying to make.
> You could lend the money you borrowed yourself to your friends at an even higher rate, if you liked.
Yes, but unlike commercial banks, you can't have the government print extra money (directly or indirectly) just because you made a loan. Nor can you lend money to your friends and also give the same money back to whoever you got it from, without waiting for your friends to pay back the loan.
> The government lends to banks and not you because it's easier to assess the risk
I understand that that's the story we get told, but that doesn't make it true. The government lends to banks because it is transferring wealth to the banks, but doesn't want to make it obvious that that's what is happening.
Well, to a degree you can. There's probably always someone to lend to you at some rate. Future loans would have to use this new rate. That's not much different than Fed lending. You don't get to participate in a large system where the friction of that is all worn away, but that's a matter of scale. I don't think we are discussing the right of individuals to get all the benefits of working at scale.
> I understand that that's the story we get told, but that doesn't make it true. The government lends to banks because it is transferring wealth to the banks, but doesn't want to make it obvious that that's what is happening.
So the government is transferring wealth to the banks. That's indisputable. I don't agree that's the purpose of the arrangement though. It's a byproduct (but a byproduct a lot of people like, and try to make sure they perpetuate) of the real goal, which is economic advancement for the whole country. I also won't dispute that it's disproportionately helping the banks and those rich enough already to be part of the system.
If you're a commercial bank, you don't have to get another loan.
> I don't think we are discussing the right of individuals to get all the benefits of working at scale.
No; but we are discussing "benefits of working at scale" that aren't really due to working at scale, but to special privileges that commercial banks have that private individuals don't.
> I don't agree that's the purpose of the arrangement though.
It's not the ostensible purpose, no. But when one looks at the history of how the Fed came into existence, it's hard to shake the feeling that it was the real purpose, whether or not anyone will ever admit that.
Yes, you do. They borrow more money from the Fed, at the current Fed rate. This may not go through all the hoops a regular lendor requires, but it is a loan. That's why bank loan rates closely follow Fed rates. It's not money for free, it's very easy loans.
> No; but we are discussing "benefits of working at scale" that aren't really due to working at scale, but to special privileges that commercial banks have that private individuals don't.
Individuals also don't have to match the regulatory burden of the banks. Any individual could match those burdens (which may require a minimum loan amount, and a minimum amount of money on-hand) and try to get themselves certified as a bank, and then they could. They would need to meet the regulatory requirements too at that point though. You could argue that banks don't have enough regulatory hurdles in place to make up for the sweet deal they are getting from the Fed, but that's not the argument I've seen put forth.
> But when one looks at the history of how the Fed came into existence, it's hard to shake the feeling that it was the real purpose
Well, I don't see it that way, so it's it's not that hard for me. In order to try to control the economy, some regulations and incentives were put in place. Those are always able to be gamed, so you can either try to reduce the gaming to increasingly hard edge cases, or do away with the regulation. I think the regulation has a net positive effect, so I'm in favor of the former.
In other words, no matter what alternative you propose, if it was adopted it would be easy to look at it, look at the proponents that gained from it, and conclude the real purpose was to benefit those individuals. There's always winners and losers in any controlled situation, as the control always suits some better than others.
Again, I agree that this was the ostensible purpose. But it only makes sense on the assumption that it is possible to control the economy in the first place; and that only makes sense on the assumption that economics is a precise enough science to be used for such control. I suppose it's possible that central bankers in 1913 actually believed that, but it seems highly unlikely to me. It seems far more probable to me that they knew they were essentially selling snake oil; but of course they weren't going to say so. They were tired of the government coming to them for money every time there was a financial panic, so they decided to do something about it, and if that meant selling snake oil packaged as "regulations and incentives to control the economy" to politicians who didn't know any better anyway, so be it.
> There's always winners and losers in any controlled situation
You're ignoring the alternative of a non-controlled situation, i.e., a free market that treats money just like any other commodity. There will still be winners and losers in such a situation, but it would be impossible to attribute that to the control preferentially advantaging some parties over others, since there would be no control to begin with.
The money supply has expanded because there is now $190 of things that work like cash out there -- the $100 on my bank account balance plus the $90 that was lent to someone else -- but this is very different from saying the bank can turn around and lend out a multiple of what I have deposited.
I misstated it somewhat, yes. The $90 gets lent out--and where does it end up? In someone else's bank deposit. Then $81 of that gets lent out, and ends up--in yet another bank deposit. And so on...
At the end of this process, your original deposit has been multiplied by the reciprocal of whatever the reserve requirement is. So a 10% reserve means a multiplier of 1/.01 = 10. So your original deposit of $100 turns into a total of $1000. (So I shouldn't have said that your $100 turns into an additional $1000 lent out--I should have said the total money supply is $1000.)
Remember also that, even though $90 of your $100 was lent out, you can still walk into the bank and withdraw the $100 any time; you don't have to wait until whoever borrowed the $90 pays it back. The same is true of all the other deposits spawned by the $90 that is borrowed, and the $81 borrowed against that, and so on... So, again, the final effect of your depositing $100 is that the total money supply is $1000.
This is true, but if everyone did this at once it would constitute a run on the bank and it would fall under its reserve ratio. Not to mention the amount of money in the banking system is far far more than physical currency in print.
This is part of why some types of accounts (trading accounts etc.) require a few days to clear transactions. The expansion of the money supply is throughout the banking system and not just cash and deposits.
Yes, it would. So what? That isn't what stops bank runs from happening. What stops them from happening (now) is that people believe that their deposits are "guaranteed" by the government, so there's no need to go rushing to the bank and withdraw notes every time the economy takes a downturn. Before that guarantee was in place, there were indeed bank runs, and for the very reason I gave.
> the amount of money in the banking system is far far more than physical currency in print.
Yes, that's definitely true. And it's also true that most transactions, even for individuals, are not done in physical notes any more; they're done electronically (with debit cards or credit cards or wire transfers or whatever). So someone doesn't have to walk into the bank and withdraw their $100 in physical notes; they can do it any place, any time.
The difference between a credit card and a debit card is extremely relevant here. You can't run a bank with a credit card.
Not when you make a credit card purchase, no. But you can when you electronically transfer funds from your bank account to pay the credit card bill.
So, even if an entity had $1 in reserve, but gave you notes representing $1,000,000, that money is valid as long as both the person you are trying to pay with it trusts that the issuing entity will honor the note, and it is worth the trade being offered (services, goods, etc). It might not be a good idea to trust that entity, but if the system persists long enough, and the entity makes enough money on fees and interest to actually cover the extravagant lending before people try to claim the notes, then in the end it was (or may be, depending on the parties involved) a net success. The issuing entity made money on the loan, the person taking out the loan was able to use it to provide needed liquidity (hopefully leveraged to make their situation better), and the person paid with the notes was able to redeem them at the issuing entity, or use them with other people successfully.
What we have currently is that the government issues, but does not want to be responsible for vetting individual loans, so only loans to large entities that then re-lend (and these lenders may take deposits as a bank or have other sources of cash to lend out). They also require these lending entities keep a portion of the amount they lend in reserve (the $1 from above), but at a certain percentage rate such that they expect in most instances the re-lending institution can weather most cases of increased demand to make good on the money for their loans (otherwise a lender could over-leverage themselves with far too much lent to deal with even normal economic events).
Person A deposits $100 in the bank.
Person B receives a loan of $70 from the bank. Just to make the example easier, their only depositor is person A.
The bank now "has" $30, of which $100 is in person A's account.
Person A buys groceries, writing a check (yep!) to the store for $80. Their account has $100 in it, so they're fine. They've spent $80.
Person B also buys groceries, with cash. They give the store $40. The store now has $120, $40 in cash and $80 owed by the bank. They can spend their $120 in turn. There's no $70 spending limit imposed by the amount of the loan to person B. Person A had no trouble spending their money like money.
Some comparisons you might find of interest:
- The store ends up with more money ($120) than existed at the beginning of the scenario ($100). This is possible because the bank created an extra $70, and 120 < 100 + 70.
- The money the bank owes the store is more than the amount of the loan it gave to person B. This is largely a pointless comparison, but does illustrate that more money is available to spend ($170) than was loaned out ($70). From an accounting perspective, the bank started out owing $100 (to person A) when A deposited that amount, and ended up owing the same $100, of which $20 to A and $80 to the store.
This is running the bank. As long as everyone uses a bank account, it's not a problem. If the depositors all try to withdraw their money in cash, the bank will be immediately destroyed, because it doesn't have the cash.
As explained in It's a Wonderful Life:
> You're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house...right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can.
A lot of work gets done without cashing out the money banks create.
What are the properties of "money", as conceived of by you, that "credit" does not share?
Thin air, and there's nothing special about it. Banks do it, and so do normal people, everyday.
Really? Normal people can lend money they don't actually have? How does that work?
If you mean that normal people can create wealth, of course they can. But that's not what we're talking about here.
They create liabilities; IOUs. Just like you can. And there's no limit to how many you are allowed to create, beyond your creditworthiness in the eyes of the party to the exchange.
Suppose I give you an IOU for $100. Can you go and buy groceries with it? Or even more to the point, can you pay your taxes with it?
There's nothing special about dollars, except that they are widely accepted in exchange and accepted by the government by mandate.
Correct. They have a choice about whether to accept your IOU or not (and, as you say, they will most likely choose not to). You have no way to force them to.
(In the case of paying taxes, the other party is the government, and they definitely won't accept your IOU; you have to pay your taxes in the government's fiat currency.)
> they would accept the IOUs of the FRB
Because they don't have a choice; by law everyone has to accept Federal Reserve Notes (I use that term because I don't agree with using the term "IOU" to refer to them, for reasons which I have argued in other subthreads and don't want to rehash here) as legal tender. And the government can back up that law with legitimate force, because it's the government. That's why having a system where the government prints money is different from a system where private entities print money.
It amazes me how many people get that backwards.
If a bank could loan more money than had on deposit, they could could simply loan themselves or other banks enough to pay off depositors. That is literally a license to print money. And the government prefers to keep that power for themselves. That's what the Federal Reserve is.
For every deposit of $10, they might earn 2% on the $9 they are allowed to lend out. They have to live on that 18 cents.
If they were able to loan out $90 or $100 (depending on what theory you hear), they'd make 10 times as much. Within a decade, they wouldn't need their deposits.
But banks do fail, so clearly that is not the case.
I think people are confusing modern banks with ancient banks that took in gold deposits and issued paper notes based on those deposits, sometimes issuing more notes than the gold they had on deposit. That is a completely different situation. And was not sustainable when it did occur.
The banking system is a huge creator of bubbles, but it does not work the way many imagine.
I asked one believer in the multiplier theory to show me the statute that says it works that way. He found the law that contradicted his belief and insisted it proved it.
Banks can loan more out than they have in the bank but it's relative to how much they have in the bank they can loan out.
It's the central banks who "vouch" for this mechanism and is why banks are said to be able to "print" money out of no-where I guess.
https://en.wikipedia.org/wiki/Fractional-reserve_banking
The point about Fractional reserve banking is to allow banks to create debt which is another way to create money. (Debt is money)
This is actually what a lot of people are missing. It's not money thats being created per se but debt (credit) which is the same thing but just in put in a different context.
If you hold one dollar of a ten dollar deposit and loan out nine, reserves ARE less than their liabilities.
They still owe $10 plus interest to the depositor. They only have $1, on average. That's less than their liabilities. It doesn't say what you think it does.
"the central bank (or other monetary authority) regulates bank credit creation, imposing reserve requirements and capital adequacy ratios"
The reserve requirement is a RESTRICTION on how much the bank can lend. Not a multiplier the bank can apply to deposits to print money.
If the Fed RAISED the reserve requirement, banks could not lend as much. If it completely removed the reserve requirement, banks could lend more.
That's my reading of your quote.
It's not "Money from the bank" but allowed debt creation backed by the central banks beyond
This is the important part of the quote which you left out.
"fractional-reserve banking permits the money supply to grow beyond the amount of the underlying reserves of base money"
Nothing in that talks about limiting it within their deposits. If that was the case then we wouldn't have had any issues at all since all banks did with the sub-prime crisis was creating debt without any actual "real money" being used as base for the loans.
If they raised the reserve requirement they could not lend out as much but still more than they have because again it's not actually money but debt. It's just that they now have much harder restrictions on the ratio.
Not a single dollar is moved from somewhere else in the bank to the lendee. It's literally just debt created.
Thats at least how I have understood it and maybe we are saying the same thing just focusing on different parts.
The point really is that banks do not actually move money they have to your account but instead create debt on your account without anything else is affected.
Not sure how else to think of it.
"The amount of reserves that a depository institution must hold against specified deposit liabilities."
http://www.federalreserve.gov/newsevents/reform_glossary.htm
And here's a table showing the exact percentages of DEPOSIT liabilities:
https://www.federalreserve.gov/monetarypolicy/reservereq.htm...
It doesn't get more definitive than that. And if it were a multiplier, how much can a bank lend out if they have less than $15 million in deposits? Infinity?
FRS is the act of central banks allowing banks to add money on accounts up to the ratio amount.
In other words. Banks can create money "out of the blue" since most money are just numbers and not actual cash.
Lending out money this way is not affecting any other accounts. No money is being taken from somewhere and put into the lendees account. Instead banks are allowed to create the loan which is debt, not to the bank but to the lendee. To the bank this is an asset to the lendee this is debt.
In other words the bank have more money after they give the loan not less.
It doesn't get much clearer hat than that IMO.
A simple statement on a Federal Reserve web site stating that such a bank has to keep deposits and that the loan comes from new money created should be sufficient.
I think you misunderstand the meaning of that quote. The money supply doesn't grow beyond the amount of underlying reserves because an individual bank lends out more than it has in deposits (and other funds). The multiplier is the result of this cascade: https://en.wikipedia.org/wiki/Fractional-reserve_banking#Exa...
Banks have become critical infrastructure.
They are not subsidized nor funded by the Federal Reserve System (the Fed) in any way. The (fractional) reserve requirement is not really relevant, because any bank can just borrow cash (discount window policy), put it into their reserve account - and presto, - lend out more. So if they want to lend out X, they have to borrow X+(0.05 * X).
But the reserve requirement and the discount window are not the main monetary policy tools, because it's usually not cost effective to borrow from the Fed.
However, it's even easier than that. Not all liabilities are (fractionally) backed by reserves, so if a bank can shuffle the money from one type to an other, it can lend out more of that. ( https://www.newyorkfed.org/medialibrary/media/research/epr/0... )
https://www.richmondfed.org/~/media/richmondfedorg/publicati... - graph on the 3rd page is worth looking at
All in all, banks are risk constrained. The growth rate of the money supply is basically a measure of how lenders think the economy will grow (how much new wealth will be created), since debt that gets paid back shrinks the money supply (assuming constant velocity of money, if the velocity increases, less money is sufficient to sustain the debt cycle).
Personal savings accounts are important, because they get access to cheap capital, so they don't have to raise it elsewhere in order to lend it out.
Effectively, banks are a strange, misaligned, mismanaged and misregulated amalgamation of a completely automatic thing [money management, transactions, deposits, ATMs] and (investment) risk assessment.
Those should be separated, or the interfaces made clear. (Such as you get a better credit rating if you grant access to your account event history/stream. And we should forget about using savings deposits and other accounts as sources for lending.)
The banks that you or I recognise as every day banks almost certainly don't make their money on corporate loans. The margins aren't high enough. The only point I would agree with from this article is that when companies become large enough they tend towards becoming banks.
The nuance here is that a traditional bank makes the bulk of its money by having control of the bulk of your money so they can sell stuff like homeloans, as you mentioned with the housing market, which aren't glamorous, but do make bucket loads of money.
An organisation that didnt start out as a purely financially focused investment/risk management machine but which does become, technically, a bank is an organisation which grows large enough that it needs to give some money back to fund all the people buying its wares. As an example, look at IBM - who do you think loans money to companies who pay billions for an IBM project? Often its IBMs Global Financial Services business. They can give you a killer rate because everything you borrow is used to fund another part of the business and can be fed back into the cycle.
The more interesting situation with Apple is that they, almost exclusively, sell consumer goods. So they are stuck with customers who probably can't afford to, and aren't at all motivated to, take out large loans to pay for their new gadget (Hence apple partnerships with enterprises ie. the aforementioned IBM as they struggle to get out of the consumer goods market. Note - this is not to imply that IBM is doing better than apple, they just have much wealthier customers)
The only thing that I'm relatively sure about is that apple isn't seeking to trump mastercard and visa, as the article seems to suggest, nor to become the bank of the people, because both options make less financial sense than continuing to be insanely profitable as technical designers and manufacturers in a cross-industry market such as technology.
Far from it. They are not deposit constrained, no matter how much mainstream economics likes to think so.
http://www.bankofengland.co.uk/publications/Documents/quarte...
See page 2 onwards, "money creation in reality". And note that this is published by the Bank of England.
The banks are not reserve constrained, so the reserve requirement is nigh irrelevant.
> In recent years, the discount rate has been approximately a percentage point above the federal funds rate (see Lombard credit). Because of this, it is a relatively unimportant factor in the control of the money supply and is only taken advantage of at large volume during emergencies.
...either way, it still has nothing to do with anything that Apple does!
But there are important constraints - from the overview in the article you linked to:
"Although commercial banks create money through lending, they cannot do so freely without limit. Banks are limited in how much they can lend if they are to remain profitable in a competitive banking system. Prudential regulation also acts as a constraint on banks’ activities in order to maintain the resilience of the financial system. "
The main constraint is called Capital Adequacy, and is based on the requirement for a bank to hold some of its own money in reserve compared to the amount of loans it issues. And importantly this money held in reserve must be money that is not pledged to anyone or anything else - i.e. cannot be money from depositors or from issued loans. The banks cannot easily increase this amount of unpledged money (which is called Tier 1 Capital) and hence it acts as a real limit on the amount they can lend.
Investment banks did enjoy acting like hedge funds, up until a few years back, but the Volcker Rule put paid to that. Mostly.
The fact that they have piles of money which they need to park says otherwise. "Advising clients on financial transactions" is precisely what they are doing...internally.
People seem to really underestimate the issues with dealing with such vast sums of cash for which you want to maintain value. It's not trivial, as the author points out.
>But Apple isn't even CLOSE to competing with Visa and MasterCard in that regard
At one point Apple wasn't even close to competing with Nokia or Blackberry in the smart phone space. Then a bit of innovation happened.
It's not about Apple wanting to become a bank, for the same reason they aren't a carrier.
How can one get so dependent on a piece of technology you ultimately do not really own?
You can just buy a phone in cash, then you own it. Not owning your phone is a choice. Even if you're on a contract (at least here in the Netherlands), the phone is often legally yours, you're just paying it off.
I take it you haven't seen Copy Doctorow's incredibly important talk[2] on this subject, which is the followup to his well-known talk about the War On General Purpose Computing. Never mind the car - if we don't stop this crap now, it won't be long before we see someone's prosthetic legs or cochlear implant "repossess itself".
[1] Actually, cars are starting to have the same problems where they can be updated remotely, in addition to the copyright crap involving John Deere's explicit claim that you don't ever own their hardware.
Ownership is something of a nebulous concept in the digital era - copyright and licensing is far more important. You may own the device outright, but that's largely immaterial. The value of the device is in its access to the network and licensed content - music, ebooks, GPS, traffic, internet, texting, fb, chat, etc. Aside from a platform to consume content and access the network, the physical device itself offers little more than a camera.
> Why do you not just own a cheap flip phone and an ipod then?
> Ownership is something of a nebulous concept in the digital era
Apple owns your data and says what you can do with its software, content and devices. Much of which you license and do not own.
[0] http://linuxoniphone.blogspot.com/2010/04/ive-been-working-o...
edit: in 2012, it was deemed not a violation of the DMCA to jailbreak a phone. Whoops.
I don't know what the consequences of exploiting a hole in their security implementation or possibly violating their ToS or EULA.
Trying to profit from such an exploit commercially would test the waters by attracting Apple's legal department.
To illustrate this point, imagine your phone is a rather complicated DVD player. DVDs have copyright protection, and as such, you may not modify your DVD player or DVD discs to extract or modify (or even play!) the DVDs on an unlicensed player. Similarly, you may not do anything remotely like that with Apple copyright-protected music or video files, or any other digital media copyright-protected by Apple. This means if suddenly all the data on your phone were bundled up and "protected" by Apple, you would have no right to said data, other than the right to use them the way Apple wants you to.
Of course, the DMCA has been amended over the years to allow exemptions to this (which are reviewed again every three years). Some allow jailbreaking, some allow remixing of media. Some allow disabled people to read their e-books (yes, this was illegal for a while due to the DMCA). You can only carrier-unlock your phone if you bought it before 2013 (seriously). Oh, and tablets/smartwatches can only be jailbroken since 2015.
A 2010 ruling determined that even if your purchase a phone, you do not own its software - you are merely leasing the phone software from Apple according to their EULA. You may find a way to modify their software, but you'll also be breaking the law.
Citation? I'm aware of OS licensing and music/video downloads like itunes, but they claim "Your data"?
By disabling these services you are severely limiting the advertised functionality and features of a device you purchased.
From Apple's privacy policy[2]:
>We also collect data in a form that does not, on its own, permit direct association with any specific individual. We may collect, use, transfer, and disclose non-personal information for any purpose. The following are some examples of non-personal information that we collect and how we may use it:
>We may collect information such as occupation, language, zip code, area code, unique device identifier, referrer URL, location, and the time zone where an Apple product is used so that we can better understand customer behavior and improve our products, services, and advertising.
>We may collect information regarding customer activities on our website, iCloud services, and iTunes Store and from our other products and services. This information is aggregated and used to help us provide more useful information to our customers and to understand which parts of our website, products, and services are of most interest. Aggregated data is considered non-personal information for the purposes of this Privacy Policy.
>We may collect and store details of how you use our services, including search queries. This information may be used to improve the relevancy of results provided by our services. Except in limited instances to ensure quality of our services over the Internet, such information will not be associated with your IP address.
From your reply:
>they certainly don't make any claim over my data; that is to say, the information I choose to store on my phone.
I was unclear, I never meant to imply they own the information you store on your phone.
[0] http://www.wired.com/2013/04/siri-two-years/
[1] http://www.mynameissiri.com/siri-and-privacy/
[2] http://www.apple.com/legal/privacy/en-ww/Have you been to a concert? A family reunion? A movie? People waiting in line? People are looking at their phones constantly, even to the point, where they're ignoring everything else around them.
Yes, people live in their phones. It's so obvious.
But that knowledge comes from how my wife and I use our pocket computers (because "phone" at this point is ridiculous, "mobile" is at least a bit more generic). I'm say, half way through my life. I can worry to death and stand against and whatever, or I can get on with life, and appreciate the convenience provided in the short amount of time I have left. It's just admitting it to myself. Once that's done (and it is) I can get beyond grandstanding and just cheer for encryption and join the EFF (I am a member) and so on, hoping to have some impact on pushing the privacy needle to one side vs the other, because we're going to use these things daily, likely no matter what.
What origin of the universe theory does the HN zeitgeist advocate?
I probably should have been more explicit but the very fact that this was misunderstood, probably proves my point about HN News and pop culture..
Or maybe you're just trolling... :)
BBT as example - low level comedy with canned laughter that relies on silly stereotypes for literally everything. Faux-geeks love it - the people who 'know everything about tech and gadgets' but can't read a line of code, the populist sciencey crowd rather than the science people themselves.
I'm not american so maybe just cultural difference but everything about is always seemed too try-hard and populist.
If HN spurns those hangeronners then I'm happy. Happy-ish anyway.
http://www.wsj.com/articles/the-big-bang-theory-has-hidden-j...
>A lot of the humor is over the heads of the general audience.
>But there are jokes inside of jokes, and for those who
>recognize the science, they’re hilarious. The show takes this
>stuff so seriously that it employs a UCLA physics professor
>to make sure it gets it right.
>Case in point: In a 2009 episode, “The Jiminy Conjecture,”
>Sheldon and Howard heard a chirp and then argued over which
>variety of cricket made the sound.
>On the whiteboard in the background is Dolbear’s law, which
>states the relationship between the air temperature and the
>rate at which crickets chirp.
>“I went to a Dolbear presentation at Tufts, and they talked
>about this, in like 1989,” says one high-profile fan of the
>show, Seamus Blackley, one of the creators of Microsoft’s
>original Xbox game console. “I remembered it!”
>“Once I realized what was going on, it was awesome,” added
>Mr. Blackley, who is also trained in physics. “It’s the No. 1
>show, and it has actual physics in it.”
I'm just not sure there's ever been a show that's attempted to deliver comedy around Schrodinger's Cat or Quantum Uncertainty. They do a phenomenal job with comedy surrounding such technical subjects, but just by acknowledging my fondness for the show, puts me in a minority here.
The reason Apple is being defensive is because of Edward Snowden. Apple supplies smart phones to the WORLD. Putting on a strong front to the FBI is a PR boon for selling smart phones abroad. They don't want the rest of the world to make a trusted Android fork because they can't trust Google and Apple. They want them to trust and buy Apple products! Unlocking that smart phone would cost Apple billions in foreign purchase orders.
So, since the FBI has that insight now, it's inconsequential for them to have it in the future? Where did you come up with this logic?
This has been my assumption from the start of this case too. Apple can't afford to lose China, if only for the purpose of avoiding negative quarterly growth reports. Becoming known by the Chinese to be hackable by the FBI, wouldn't go over well there.
This may not be avoidable. Even blackberry had to do this ([1], dozens more). But if anyone has strong enough market power to push governments towards privacy, it's apple.
[1] http://www.theguardian.com/technology/2010/aug/10/blackberry...
If Apple were to become a bank, I don't see how they would get around those regulations. In fact, I'm pretty sure that once Apple were to become a major financial institution, the authorities would certainly ask for access to data on financial flows -- and given the state of legal affairs, might have a much stronger case.
(Remark: I'm sceptical about Apple wanting to become a bank being the reason for the Apple vs. FBI conflict. I think it is nonetheless plausible for Apple to become a bank.)
He's arguing that the FBI backdoor would introduce an unacceptable backdoor into a hypothetical Apple "Bank" which bad guys could exploit.
Not sure I agree with that argument either, but it is orthogonal to your valid point about know-your-customer.
"And this is why Tim Cook is willing to go to the mattresses with the US department of justice over iOS security: if nobody trusts their iPhone, nobody will be willing to trust the next-generation Apple Bank [...]"
All the author is talking about is a general perception of trust, not any actual backdoor.
> I'm going to assume you know what Apple Pay is: you use your iPhone, iPad, or Watch as a trusted, authenticated identity token in a shop to pay for stuff. It ties into your bank account and basically your phone swallows your debit and credit card.
I thought that was fairly explicit. If the phone (or watch...) is going to be the primary tool of payment than its security is paramount. Apple wants at least the same level of protection against tampering as the chip inside a modern credit card.
1. https://en.wikipedia.org/wiki/Linksys_iPhone
2. http://www.networkworld.com/article/2295551/network-security...
3. https://en.wikipedia.org/wiki/Apple_Corps_v_Apple_Computer#1...
4. https://en.wikipedia.org/wiki/Apple_Corps_v_Apple_Computer#2...
5. https://en.wikipedia.org/wiki/Apple_Corps_v_Apple_Computer#2...
I think the article is mixing up banking with payment processing (payment processing is an important but small part of retail and wholesale banking).
Retail banks make most of their money by charging for loans - either individual overdrafts, personal loans or coporate loans. For apple to be a profitable bank they would have to start assessing businesses and individuals for creditworthiness. It seems quite far from their current business model and not obvious why they would want all the regulatory oversight that comes with it.
Well, if not a bank something like VISA.
They wont.
But that's about Apple Pay transactions, which are logged into their central servers anyway, and will be given to the government when asked, as all banks do.
This is not about data on Apple Pay transactions, but about Apple Pay's security itself.
You wouldn't use an easily compromisable phone as your be-all-end-all wallet, the same way you wouldn't use an insecure banking portal.
Obviously because the whole point of the article is not to merely echo the sentiment, but to attempt a guess at the reasons behind it.
I think the real reason for Apples worry is that they want people to trust the smartphones for way more then just payments, for instance Health information. And people might just end up much more reluctant to do so if they know the phones are easily hackable.
Author's claim was that they defend security of their platform to outcompete other payment processors on fraud insurance costs.
Wherever they are logged, they will be available to the government -- Apple doesn't care about those data, but about the security of Apple Pay.
Only for the FBI/law enforcement though. A backdoor has no such restrictions, making a backdoored iPhone vulnerable to attacks by black hats.
It's not just about making money. It's not just a marketing pitch. It's not just because it's technically stupid to do what the FBI wants. It's not purely driven by Apple's concern for its customers.
It's all of those things at once. Everyone in the industry thinks the FBI is being boneheaded. The current and former heads of the NSA think the FBI is being boneheaded. Google, Microsoft, and Amazon.
You don't need to look behind the obvious motives for something underhanded. It's. freaking. obvious.
Smart phones are increasingly wallets, and they give us access to all
sorts of accounts [...]. NSA will tell you that stealing login credentials
is the most effective way into a system. [...] Here's where smart phones
are extremely important: they are poised to become authenticators to a wide
variety of services.
Dr. Landau mentions this kind of use just prior to my t=12977 link to the hearing. I'm specifically quoting the part that seemed relevant to Stross's banking theory.
I actually kind of see it as being of no importance which way the coin falls here on what's been triggered by the San Bernardino case. The security oblivious will remain oblivious regardless of the outcome (identity politics and the Kardashians are far more compelling than encryption). Equally, the skeptical amongst us will remain skeptical - even if Cook holds onto the Iphone encryption we'll always be suspicious of backroom deals or potential backdoors. Whatever the fallout, neither scenario infringes on the legitimacy of Apple as a financial institution - should that even be their play.
No, when it comes to their banking accounts and e-wallets, we haven't.
Keep in mind, the original parent was discussing privacy of data, not security. It's very aparent that a majority of people don't give a shit based on their actions.
I suppose you are free to not believe this, but it's quite obvious.
They might not give a shit in principle. But they sure will raise hell if anything happens to them -- especially a big breach affecting tens of thousands or even millions.
And if Apple is the one having the breach, the media will also have a field day, like with all the BS -gates (antennagate, bending-gate, etc), but this time with a very real and very important issue...
Not just read-only access: their username and password. I was sure that would never fly. I was wrong - they had at least a few thousand customers in three months after launch. I don't know if that's a success, given the US population, but more than the zero I expected.
So... I think convenience trumps even bank account privacy.
That's fairly strong evidence of ignorance, not consent.
People are overwhelmingly happy to share their spending data for some convenience.
This meme is more projection and wishful thinking than fact. People do "give a shit" about their data. Unfortunately, many people are do not understand the details about how much data they are giving up, or what alternatives are available.
Claims that people don't care about their data are useless until tech companies stop over-promising their features and security, and when data is only collected after verifying someone has giving their informed consent.
Given his position and the overreaching request by the FBI, I think most of us privacy-conscious HNers would behave the same.
When you're analyzing something, "follow the money" is always good advice. But I think it's much simpler here, following the money just means that at this point, Apple is the iPhone company, and they're going to do everything they can to guard that business. That's why they went so berserk with lawsuits regarding Android.
It's their bread and butter, obviously.
But as the article makes clear, there is a specific type of problem associated with having as much money as Apple does, and it becomes a business in itself trying to manage those finances. Eventually, if it hasn't already, that management becomes the business, whether Jony Ive wants it to be or not.
I think the article is premised on a misunderstanding of what banks are and are not. A company does not need to be a bank or payments processor to manage a huge pile of money for a profit goal. In fact it's way easier to do that if a company is not a bank or processor.
It didn't even cost that much to move cash and checks around in the old days.
Retailers, for whom it's a big chunk of their margins, are up in arms about it, the Fed is up in arms about it and pushing a move to intraday EFT and ACH, and tech like Bitcoin and better security of e.g. Apple Pay is moving against it. Payments are going to change.
For all the over the top rhetoric, the basic claim that securing the device against any and all hackers is critical to Apple's brand and ambitions, and the idea that Apple could do an end-run around the credit card companies and banks and try to run the table in payments, are totally on target.
Keep in mind that Apple gives law enforcement everything it knows in response to a legit request, the phone doesn't make the payments system less transparent to law enforcement. On the contrary, Apple's ability to maintain a closed garden is key to maintaining a degree of control over payments and comms.
Except the phone they were asking is a 5C, which doesn't support Apple Pay because it doesn't have a secure enclave or fingerprint reader.
Risk management: call me back when they figure it out. http://www.nytimes.com/2015/03/17/business/banks-find-fraud-...
Quoting article you linked: "the banks may largely have themselves to blame."
Apple Pay appears to be a secure system, and was designed by engineers to be such. The process of getting a credit card loaded into Apple Pay appears to be a woefully insecure system, and was designed by banks to meet the bare minimum of regulatory compliance and no more.
Some banks actually perform some due diligence; one of my cards, when I added it on my phone, required some verification steps to prove to the issuing bank that I was indeed the cardholder I was claiming to be. But another simply loaded onto the phone instantly with no verification. It doesn't take me long to figure out how that leads to fraud.
>Some bank executives acknowledged that they were were so scared of Apple that they didn’t speak up. The banks didn’t press the company for fear that they would not be included among the initial issuers on Apple Pay.
Sounds like there was pressure from Apple.
Regardless, there's absolutely no sign of the security claimed by OP. You'd at least expect parity security, not an order of magnitude more.
What? Never heard about this. Is he bullshitting about this or is there some validity behind this claim?
It's somewhat difficult to find the event on Google due to results of the search being masked by the last IOS "goto fail" SSL vulnerability. http://arstechnica.com/security/2015/04/critical-https-bug-m...
While I'd imagine this is open to some interpretation, IOS is the least secure mobile OS, at least in terms of the number of vulnerabilities it has. It is not worth believing it is immume from the same failings of other OSes. http://venturebeat.com/2015/12/31/software-with-the-most-vul...
This data doesn't indicate whether bugs were found and patched internally, or were actually exposed first by malware.
http://techcrunch.com/2014/02/20/simple-acquired-for-117m-wi...
Then moved on from there and making it into "Simple, The Apple Bank". The fact they didn't move in that direction makes me think it never really occurred to them.
How Stross made the leap from a special version of the OS that the FBI could use to eventually crack a password to the easy clone-on-use nature of a card skimmer is completely farcical and looks like something that the mainstream non-tech press would come up with.
Just as prone to fraud? I don't understand the need for that kind of hyperbole in an article that looks like it was intended to be taken seriously.
And given Juniper systems was likely a government placed backdoor, there is ample evidence this is true.
Well, except that the ATM doesn't permanently store your credentials, potentially[1] making them available to anyone who takes possession of it.
Not to mention: it's possible, though not easy, to take possession of a whole ATM. However, the people who have done so were after the bank's money, not your money.
Whereas if someone steals your device they're potentially[1] getting hold of your money.
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[1] Read: it's only a matter of time.
Having your source code stolen gives your competitors an edge by letting them know, for free, how you've implemented things that might have cost you millions/billions to research and produce.
The biggest threat to having source code stolen is exposing the potentially embarrassing paperclips, string and gum holding a product together.
> Hasn't happened yet has it?
Years ago and at the time the most profitable software company, Microsoft had its flagship products, the NT kernel and Windows 2000, source code leak.
It isn't unheard of.
> I don't think the overall security risk increases by the existence of a backdoor on a single phone.
If the precedent is set for this single phone, then the security of other phones is at stake. This is also a red herring. It is not about this singular phone.
edit: You do not need the source code to find a backdoor or vulnerability[0]
[0] every closed-source product that's ever been exploited
The retail banking industry suffers from low consumer satisfaction, as it earns the bulk of its profits via fees, personal loans, and mortgages. Apple historically wants no part of that. Competing on margin by mitigating fraud doesn't make sense.
Given Tim Cook's background he may also truly believe in privacy for the masses but that's a byproduct. Apple knows that with all their competitors slowly but steadily stepping up their game and offering solid smartphones for 1/3rd of the iPhone's price and little practically left to do for Apple to stand out in non-USA markets, privacy is their one big appeal. That plus lower priced iPhones and Apple's brand value practically guarantee that Apple will stay ahead - take out one leg and it starts to look shaky.
I think they'll continue to emphasize it to sell iPhones until they find another market that's as lucrative as the iPhone is.
For all the dramatic prose in this article about Apple's finances, they managed to miss by a fair bit on how much cash Apple has.
It's closer to $215 billion. $16.6b in cash or equiv, $21.3b in short-term, $177b in long-term marketable securities (most of which can be converted to cash relatively quickly, so when calculating Apple's cash pile that is commonly included).
If you remove their $53b in long-term debt (which has a very low interest cost on it) you get $162b. The article didn't specify that it was subtracting debt of course.
Although it makes it's not particularly revealing. Yes, companies want more control over security because that allows them to pursue business opportunities. No need to even follow the money here, it's just common sense.
As the comments depict, becoming a bank will only make things harder and if someone trying to get profits out of a product or a service is wrong, then everything in this world is wrong.
You are talking about legacy software used by banks. Are you trying to say that we should not advance in financial systems? Or are you saying that they are superficially unbreakable?
He gives the example of Apple being in a better position to detect fraud, for instance, by virtue of the fact that Apple knows where your phone / watch is, and by extension where you are, compared to a credit card company that only knows where your card has been used.
Apple Pay as architected now outsources all the pains in the butt to the existing payment processors: getting terminals into stores, dealing with chargebacks and fraud, and providing regulatory compliance.
Apple gets to deal only with with their existing customer base, take a tiny tax for authenticating transactions, and enhance the value perception of the iPhone and Watch, which is where they actually make their money.
Apple could certainly start competing on their home turf with respect to payments and checking accounts, but there's very little profit in that.
Good point, Apple's incrementally upgraded legacy infrastructure was designed in the 1990s.
Then, here is my story about Apple vs FBI (sceptical too).
FBI (really, NSA) knows of only one phone (company) that is easily crackable, and its IPhone.
So Why a sue?
This has to be taken utmost care. When FBI sues against Apple, and they say they can't crack (some say, hack), people think that its true, and they trust more in Iphone. Result: More sales for Iphone. FBI (NSA) has more phones crackable. Benefit is for both.
So Why Android is less crackable? Answer: It's not. But a user can easily replace it OS with something safe (like, another android like replcant OS). So, FBI (NSA) shall have to try harder to break into.
So why not windows phone? Hm... You should not store any obsolete data in your mind.
Thank you.
Apple are a big company - they cannot be trusted by default. And banks right now make their money in two ways - gambling with the money of the rich and using all kind of creative late fees to prey on the poor. Neither of those requires uber secure pocket ATM.
The second largest business for Wells Fargo - America's most valuable bank - for example, is wholesale banking from businesses with at least $20m in sales, where they get about 35%-40% of their profit.
You'll find that an extremely small percentage of profit is derived from 'the poor' in Wells Fargo's business (the same holds true for Citi, BofA and JP Morgan). Their community banking segment, which targets the median and higher, is their prime profit center, contributing about 60% of their profit. You don't earn $23 billion per year in profit on late fees from the poor, very few of whom have accounts with Wells Fargo to begin with.
One very quick look at the largest financial services companies that do target the relatively poor, reveals how little profit there is in that segment compared to what the big banks do. It doesn't scratch the surface for a company the size of Wells Fargo.
For US banks - 42.3 billion collected in account fees over 12 months, 32.5 billion of which were over-draft fees. So yeah, quite a bit of it they do.*
[0] time.com/money/4071290/bank-overdraft-charges-fees/
FBI & Apple are both stupid.
Computers always ends up to be used in a real physical world. This is called the analogic hole.
This has since decades enable to weaken crypto with side channels (temperature of CPU, times of computation, EM radiation, noise of the keys...).
And how useful is it to spend billions of dollars to break new technologies when at the end human will still interact with computers with analog means?
Microphones, cameras are still working. And it covers 30% of the surface of what a secret service requires to be able to know. And cold war has left government with more than enough cheap efficient technologies. Being smart and foxy covers 15%. 5% is PURE LUCK.
Science is about aligning the cost of detection with its efficiency. Crypto is efficiently made so that breaking algorithms is more and more costly. Detection by measure/math is always failing at one point. (false positive/negative)
And what about the remaining 50% ? It is HUMINT. When people love the place where they live and trust their government they are more likely to snitch the criminals. To help keep the social peace.
Yes, social concord is what protect a nation. People feeling united and trusting their own governments.
I think that electronic intelligence is counterproductive.
I also believe we would live in a better world if laws and moral where in sync with who we really are. If we did not required secrecy to be who we are because governments made illegal stuff that are not crime, except in the eyes of a minority.
Education could help too; people when fearful are behaving like dangerous trapped animals. Education purpose is not about making citizens obedient or fearful, it is about making them able to become political leaders themselves.
Every citizens should be trained in the optic they will be a member of the parliament. The next Benjamin Franklin, Roosevelt, JFK, Lincoln ...
USA has beaten the former colonial power with education. Scientific education. It could be time USA become a great nation again.