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Follow the money: Apple vs. the FBI (antipope.org)
534 points by cstross on Mar 28, 2016 | hide | past | web | favorite | 246 comments



The logic in this article seems confused to me.

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.


> 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.

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.


This is the second time I've seen this link come up recently. It is describing the banking system in the UK, which has no reserve requirement. The US, on the other hand, does: https://www.federalreserve.gov/monetarypolicy/reservereq.htm


That can easily be bypassed by usage of the discount window.

https://en.wikipedia.org/wiki/Discount_window


Your own link says this at the bottom of the introduction:

> 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.


And in recent years the economy in general have been on life support. No lending, no need for the discount window to line up the numbers.


>which has no reserve requirement

The banks are not reserve constrained, so the reserve requirement is nigh irrelevant.


Thanks very much for this read. A couple pages in an I've already learned more than in some of my classes this semester.


You might like this course: https://www.coursera.org/course/money


If you want to learn more about the US system, this paper might be better. It is old (from the 90s), but I don't think things have changed all that much since then, at least as far as reserve requirements go: https://www.federalreserve.gov/monetarypolicy/0693lead.pdf



> Far from it. They are not deposit constrained, no matter how much mainstream economics likes to think so.

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.


Actually I think he's right. See page 18 (page 5 of the PDF), which explains what actually limits how much money banks can lend. Their need to earn more than they pay in interest is a fundamental part of it: in the longer term banks need to attract enough deposits to cover their loans, which may mean increasing the interest they pay to depositors, which in turn constrains their lending due to their need to earn more than they pay out in interest in order to cover their other costs and hopefully make a profit. (It's quite a lot more complicated than this summary, of course.)_


That's a really cool paper! I guess, to be precise: a commercial/retail bank needs to earn above its cost of FUNDING, which is actually lower than the rate it pays on its deposits because it only has to hold a fraction of that money in reserve (which is where the money creation comes in - they're lending out more than they're holding).

...either way, it still has nothing to do with anything that Apple does!


>I would strongly disagree with the author that Apple is a "de facto investment bank"

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.


Why is this article even on the front page (#1 even) of HN? Is this guy famous? His article is pure ramblings and defies common sense.


Stross is a well-known and popular science fiction author and former system administrator. Pundits and SF authors don't need to be accurate to project what may happen in the future (e.g., Clarke assumed we'd have manned communications space stations in geosynchronous orbit rather than automated robots).


To me, your comment read as though he was a San Francisco author. It took another comment to figure out you meant Science Fiction.

I read entirely too much HN.


Haha, same happened to me!


Just upvote, in this case, no need for 'me too' or +1s.


Charles Stross is an author, and has written some (really good) SF that covers some stuff in a way that HN appreciates.

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_...


He submitted this item himself. Sneaky bastard.


What difference does it make if the author is famous or not? Famous people get things just as wrong as non-famous people. (And I have no idea why you think the article defies common sense. It seems like a perfectly cogent argument to me.)


I agree that fame should not be a sole qualifying attribute for getting on the front page here, but I think fame can be a qualifying factor, if used appropriately. That is, if a person is famous for being prescient in items relevant to the post, or if they are well known or respected in that sphere, that can help carry some legitimacy to their views to those that aren't entirely capable of assessing the merits of the argument, and would rather not spend time researching claims from someone that turns out to be a rambling idiot.

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...


The late Christopher Reeve said it perfectecly. It never got any coverage, but it made me instantly like him more.

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?


Fame is a pretty important social indicator.


>What difference does it make if the author is famous or not?

It would explain why this jibberish is #1 on HN.


He probably is famous in hard sci-fi genre. He's got a wikipedia page[1]! I didn't know until this post.

[1] https://en.wikipedia.org/wiki/Charles_Stross


It's on the front page because people often find what Charlie Stross' writes to be of interest (even if they don't necessarily agree). It's democracy at work, basically.


A CPAN author, former tech journalist, hugo award winner. His works are so on the intersection of economics and scifi that apparenly even Paul Krugman has reads him.

http://crookedtimber.org/2009/01/27/stross-on-development-ec...


Apple Pay uses (used?) the American Express payments network. It's accepted at card terminals where they 1) have the hardware to talk to an iPhone and 2) accept Amex. The issue with Apple disintermediating the credit card networks is that they're currently in the loop. This means that they'll be far more capable of obstructing a disintermediation play, if for no other reason than that it'll be hard to do it as a surprise move. Otherwise, I totally agree that they're not a bank nor an investment bank. Really, they're highly unlikely to go in that direction at all, given that they don't have any incentive to lend or credit anyone. They're far more likely to directly interact with banks, heading in a direction somewhat like Paypal, if they can pull that off. At that point, they avoid most (all?) of the banking regulations, though it starts to look like a disintermediation play very quickly from there.


Yeah most people forget that banks today don't really make money on peoples normal savings accounts. The interest is simply too low.

They mostly make their money on huge corporate loans, investing and housing market.


That's a false dichotomy.

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.


In theory you are right. In reality thats just not how they make their money. Amongst other reasons because the governments have deemed them too important for normal people and so they in effect subsidize them and fund them through amongst other things Fractional Reserve Banking.

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.


> governments have deemed them too important for normal people and so they in effect subsidize them and fund them through amongst other things Fractional Reserve Banking.

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).


"reserve deposits are a fraction of lending, not vice-versa"

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.


When banks lend someone money via FRB they aren't moving money from one account to another to make them available on the loaners account. They are literally making the money appear without it afecting any other account in the system.

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.


May I ask why you think that is the case?


"Because bank deposits are usually considered money in their own right, and because banks hold reserves that are less than their deposit liabilities, fractional-reserve banking permits the money supply to grow beyond the amount of the underlying reserves of base money originally created by the central bank.[1][3] In most countries, the central bank (or other monetary authority) regulates bank credit creation, imposing reserve requirements and capital adequacy ratios. This can limit the amount of money creation that occurs in the commercial banking system, and helps to ensure that banks are solvent and have enough funds to meet demand for withdrawals.[3]"

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.


"banks hold reserves that are less than their deposit liabilities"

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.


Thats not what Fractional Reserve Banking is.

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.


Here's what the Fed says:

"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?


A bank that doesn't loan out more than it has is not involved in FRB.

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.


I know you think it works that way. But can you point to any authoritative evidence that it works that way?

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.


"fractional-reserve banking permits the money supply to grow beyond the amount of the underlying reserves of base money"

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...


> reserve deposits are a fraction of lending, not vice-versa. I'm still not sure how that's governments subsidizing them though.

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.]


The $900 comes from trust. If I'm a highly respected and wealthy individual in a 18th century village, I could conceivably issue my own notes about my promise to pay the recipient. If someone comes to me for a loan, I could issue a number of these notes to that individual, and anyone else in the village that trusts my ability and likelihood to pay might be willing to take those notes. I have just demonstrated my ability to lend money with no reserve, since I have not demonstrated my finances, people have taken it on reputation and trust. This will work for as long as I'm both mostly restricting my loans to people that will pay back, and not too many people try to redeem the notes at once. This is possible without a government, so the government is not responsible for allowing this, they are putting some restraints on how much of the money I have on hand I can leverage in this manner, so they are regulating it.


> The $900 comes from trust.

Trust of whom? Who prints the money?


I said "I could issue a number of these notes". It comes of trust in me, or trust in the system of people getting notes from me, as they see the outcomes.

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.


> I said "I could issue a number of these notes".

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).


Okay, then the answer to your question "Where does the rest of the money that's lent out come from?" is that it's a passed through loan. The central bank (government) lends the bank you are dealing with funds at a specific rate (publicized), in large amounts. The bank you are getting a loan from then re-lends this money to you at a higher rate. You could lend the money you borrowed yourself to your friends at an even higher rate, if you liked. You would need to make sure your friends were likely to pay you back though, as if they don't you would still be liable for the money you borrowed (thus why you charge a higher rate, in addition to trying to make some money). The government lends to banks and not you because it's easier to assess the risk, and different banks are more willing to take bets and invest in specific things the government might see as too risky.


> then the answer to your question "Where does the rest of the money that's lent out come from?" is that it's a passed through loan

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.


> 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.

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.


> to a degree you can. There's probably always someone to lend to you at some rate.

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.


> If you're a commercial bank, you don't have to get another loan.

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.


> In order to try to control the economy, some regulations and incentives were put in place.

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.


There is a subsidy, but you are putting it in the wrong place in the chain of events. It is the government backstop that is the subsidy, not legalizing the ability to make promises.

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.


> It is the government backstop that is the subsidy, not legalizing the ability to make promises.

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.


> it's "making promises they know they can't keep".

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.


> If that's the case, how do they keep fulfilling those promises?

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?


> 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).


> Overall economic growth.

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.)


> Thank you very much! You have actually come out and said what even Nobel-Prize-winning economists are unwilling to say.

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.


> FRB can exist with just deposits

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.


> Instead we just get occasional meltdowns of the entire economy

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).


> We haven't had another great depression

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"?


I assume you're trying to imply that it comes from the government. Fractional reserve banking started before central banks, and that extra $900 came from notes the bank printed out, which people would accept as payment for goods and serviced because the bank was reputable.

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.


> I assume you're trying to imply that it comes from the government.

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.


>The government prints money whenever a bank wants to lend it out

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).


> Currency in circulation is but a fraction of the money supply

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.


>Aren't you contradicting yourself? You just said "redemption" had nothing to do with it.

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 did use the word redemption, but in a completely different context than you.

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.


> A bank doesn't give me an IOU when it gives me a loan; it gives me actual money

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".


> 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.)


A 10% reserve requirement would mean that if you deposit $100, then your bank can then lend out $90 of it, not $1000.

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.


> A 10% reserve requirement would mean that if you deposit $100, then your bank can then lend out $90 of it, not $1000.

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.


> you can still walk into the bank and withdraw the $100 any time

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.


> 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.

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.


> 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.


> 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.


I've heard this many times but never understood it. How is there $190 of things that work like money? It seems like $10 of the original $100 is locked up, and only $90 is available in for purchasing goods; the owner cant use his money like money (only the assurance of "having" it, not the property of buying anything with it) -- only the person who ultimately gets lended that money can.


Imagine the following scenario:

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.


Thats a good description. I may just be getting hung up on (meaningless?) semantics, but its still not quite the same as money but more like credit -- even though $170 is in play, nobody can actually go and get $170 dollars (well, other people's deposits at the bank notwithstanding). I guess fiat is also credit in a sense; but I wonder if the scenario somewhat conflates credit and money. That is I wonder if the bank "expanding credit" really means anything, or if that's simply the nature of credit itself. Thanks for the comments.


> even though $170 is in play, nobody can actually go and get $170 dollars

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?


Because we aren't trading actual goods, but notes that are "guaranteed" to be worth something. That's fiat money. You aren't trading actual gold coins, or even coins or notes guaranteed to represent a specific amount of gold or silver, but notes guaranteed to worth something as long as well still believe in them. It's a system of trust, and if enough people distrusted that the notes were worth anything, it would collapse (as has happened in other countries in the past).

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).


>Where does the rest of the money that's lent out come from?

Thin air, and there's nothing special about it. Banks do it, and so do normal people, everyday.


> 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.


>How does that work?

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.


> They create liabilities; IOUs.

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?


That depends on whether the party to my transaction accepts your IOU. Most likely, they would not. But they would accept the IOUs of the FRB. That's why we use them.

There's nothing special about dollars, except that they are widely accepted in exchange and accepted by the government by mandate.


> That depends on whether the party to my transaction accepts your IOU. Most likely, they would not.

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.


Basel III is the new risk limit framework.

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.)


While you are empirically correct that banks don't earn the significant amounts of money just from individual savings accounts, it would be logically flawed to assume that savings accounts (a means of collecting temporary use of additional funds relatively cheaply) are designed to be profitable. It's an interesting market where the product you are harvesting is the one which is used to buy that product.

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.


Apple is kind of like an investment bank, but he should have said "merchant bank," but the principle is the same. Apple loans its capital to other corporations to finance capital investments.


He should have said "hedge fund" rather than "investment bank".

Investment banks did enjoy acting like hedge funds, up until a few years back, but the Volcker Rule put paid to that. Mostly.


I actually think this article is a bit narrow minded. Apple wants the phone to be your central hub (and has succeeded). You can't live without your phone. You use it for a medical study, for private messaging, for intimate photos, etc. making it compromised and easy to crack would bring halt to that thinking and make the phone's utility moot.

It's not about Apple wanting to become a bank, for the same reason they aren't a carrier.


I am unable to imagine that. For me, my phone is an annoyance. It interrupts me, the only thing it has that is useful for me is mobile internet (that I use rarely), emergencies, and music.

How can one get so dependent on a piece of technology you ultimately do not really own?


I get that the Hacker News crowd maybe a bit more anti-social, but how do we continuously ignore what's going on in the general population (HN == anti-Facebook, anti-Big Bang Theory, basically, anything that's popular)?

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.


Yup. I do, too. I understand better than most people the trade off and what price I'm paying, but he reality is, I accepted it a while ago. I keep my daughter off of all social media (she's not quite 2) because I know one day she'll be more dependent on it than I am (writing this on an iPhone) and I want her to be able to create her own digital identity and not be stuck with hundreds of baby photos defining her before she gets a chance to.

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.


The best theory of the formation of the universe is the Big Bang Theory. I check HN at least daily (often far more), and I haven't seen any posts regarding alternative theories or poking holes in the Big Bang Theory.

What origin of the universe theory does the HN zeitgeist advocate?


LMAO.. Big Bang Theory... The TV Show.

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... :)


I'm new to HN and the main thing I notice ( and like) is that people here don't seem so obsessed with mundane rubbish.

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.


While the value of watching a "rubbish" comedy (or TV for that matter) certainly is debatable, the content of the show, or at least the accuracy of the physics jokes, are spot on. They are pretty rigorous in their joke fact checking :

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.


I know physics professors who enjoy the show.


Might not be American and have no idea what it is.


Valid point.


I think this comment just reinforces his point hahahaha


Whoosh


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 - 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
Richard Stallman told us that any piece of software that you cannot modify but someone else can has to be considered as malware. In this sense about any mobile phone must be considered as malicious, since there is (besides OsmocomBB, for which using is of dubious legality) no free baseband processor. Even more imporatant mobile phones are location tracking and bugging devices with built-in telephony functions. Thus it is no question why owning a mobile phone is a very bad idea in general (I know very few applications of mobile phones that justify these large flaws).


Your opinion is valid but it is largely not the opinion of the majority.


You've summed up my life in a sentence.


I am dependent on roads and I don't own them. I don't see the connection between ownership and dependence. Also how do you not own your phone?


Owning usually means you can use, modify and control/own what you produce with your property to your heart's and physical reality's extent.

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.


> Apple owns your data

Citation? I'm aware of OS licensing and music/video downloads like itunes, but they claim "Your data"?


Data collected by Apple produced by your activity for things like product metrics, improvements, Siri, traffic data / directions or whatever they decide fits their business model at a later date.


The collection of which you can decline during the setup process. Further, even if Apple could be said to own the analytics data you're talking about, they certainly don't make any claim over my data; that is to say, the information I choose to store on my phone.


Can you opt out of App store analytics? What about data collected from Siri[0], of which Apple says it can hold on to for two years[1]?

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/


How does Apple prevent you from modifying your phone? Sure you'll void your warrantee, but other than that I'm pretty sure you can do what you want with your phone.


The DMCA, for one. If there is a copyright protection mechanism on the phone, Apple has the right to prevent you from defeating said copyright protection. The language is generic enough that anything you want to modify or use on the device is subject to their approval.

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.


Try running a non-Apple signed OS on an iPhone.


Been done [0], albeit not on recent hardware.

[0] http://linuxoniphone.blogspot.com/2010/04/ive-been-working-o...


That qualifier at the end is because Apple does their very best to prevent this sort of thing, and any time you see it being done, it means someone is exploiting a security vulnerability which will surely be patched.


Apple just has to issue a patch for the hack, and may have already, given that the project has been dead for 5+ years.

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.


> 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.


If Apple (or anybody else) controls root access to the phone or if they can force software updates onto the phone, then you don't actually own the phone.


I'm not sure that logic really holds, what part of the definition of ownership specifies this? If you drive your car without insurance it can be forcibly taken from you, does that mean nobody truly owns their car?


Toyota doesn't[1] get to modify your car without your permission. And yes, this means "nobody" owns the stuff they buy when someone else controls it.

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.

[2] https://www.youtube.com/watch?v=nypRYpVKc5Y


You don't need to imagine it, you just need to look around and see what other people do instead of only considering your own use case.


The FBI already has incredible insight into banking transactions. This would not be an extraordinary power for them.

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.


>Apple supplies smart phones to the WORLD.

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.


Not to mention the (obvious, ugly) next step: every country in the world demands the exact same privileges the fbi get. And why shouldn't they?

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...


Curious, what do you make of China's demands on Apple related to the "security" of iOS and the iPhone? Why do you believe this hasn't cost Apple billions in foreign purchases?


> The FBI already has incredible insight into banking transactions. This would not be an extraordinary power for them.

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?


I'm sceptical about this. The reason is that all banks in the US are subject to rather stringent know-your-customer regulation. They have to obtain documentation on their clients, which by law can be shared with the authorities. As far as I know, this makes it rather simple to trace the flow of money, at least domestically.

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.)


Yes, I'm sceptical too.

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.


>I think the article is mixing up banking with payment processing (payment processing is an important but small part of retail and wholesale banking).

Well, if not a bank something like VISA.


They're better capitalized than most banks and have nearly the entire infrastructure set up for end to end payments processing, I'm proposing acquiring Square to complete their processing arm. So why not be a bank AND a payments processor? They can run the bank as a separate entity and not have the regulatory scrutiny come down on the whole company.


>I'm sceptical about this. The reason is that all banks in the US are subject to rather stringent know-your-customer regulation. They have to obtain documentation on their clients, which by law can be shared with the authorities. As far as I know, this makes it rather simple to trace the flow of money, at least domestically. If Apple were to become a bank, I don't see how they would get around those regulations.

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.


Apple Pay transactions are not logged on Apple's "central servers". Apple has absolutely zero insight into what you buy with Apple Pay. The tokenization protocol is run by the card networks, not Apple.


Well, that's orthogonal to the argument.

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.


* for now


Banking systems don't need impenetrable security for people to use them. People pay online and use online banking every day from easily compromisable laptops. They do so because banks and credit card companies have good fraud coverage (unless you're negligent).

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.


> Banking systems don't need impenetrable security for people to use them. People pay online and use online banking every day from easily compromisable laptops. They do so because banks and credit card companies have good fraud coverage (unless you're negligent).

Author's claim was that they defend security of their platform to outcompete other payment processors on fraud insurance costs.


If the article's point is just that Apple wants to maintain customer trust in the security of the iPhone, well, Tim Cook has stated exactly that numerous times. I don't understand why it took a whole post full of ill-considered speculation about banking to echo that sentiment.


>If the article's point is just that Apple wants to maintain customer trust in the security of the iPhone, well, Tim Cook has stated exactly that numerous times. I don't understand why it took a whole post full of ill-considered speculation about banking to echo that sentiment.

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.


Do we really need a secret Apple bank plan for this to make sense? Heck, millions of people already bank on their iPhone, using apps.


That doesn't conflict with his argument, which doesn't really make sense until the final paragraph.

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.


I think the argument is a bit more vague than that, quote the article:

"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.


He also mentions the phone as a tool for payment:

> 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.


Note that there is already a bank called Apple Bank [0] and a software product called iBank [1]. So what are they going to name their hypothetical Apple-computer-financial-institution?

[0] https://www.applebank.com/ [1] http://www.ibank.com/


There was a Cisco IPhone[1] before there was an Apple iPhone, Apple somehow made it work[2]. Apple Computers had also signed an agreement[3] with (the Beatles') Apple Corp in the 80's not to enter the music business, but they did[4] and also made it work[5] after breaching the agreement. Having piles of money can solve a lot of disagreements

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...


Well, they could just buy applebank and ibank. There's quite a bit you can do with $0.1 trillion dollars.


I am pretty sure Apple has enough pocket change to buy both of them with their morning coffee.


They could just tell them to change their names, "It's not that big a deal."


I would second your remark. I think this issue is more complex with many more interests in play and Apple can create various advantages from appealing more trustworthy to customers. Nevertheless I'm very opinionated that none of the major causes is being genuinely concerned about privacy (until it is theirs) as some were championing them, especially their CEOs.


>As far as I know, this makes it rather simple to trace the flow of money, at least domestically.

Only for the FBI/law enforcement though. A backdoor has no such restrictions, making a backdoored iPhone vulnerable to attacks by black hats.


Pity Apple don't have a widespread network of retail storefront locations....


There's a certain group of people who seem determined to see some Machiavellian motives behind Apple defending the security of its (and everybody's) encryption.

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.


Susan Landau, during[1] the House Judiciary Committee hearing:

    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.
While I think that Apple has good reasons to fight the FBI's order for simple constitutional reasons, they obviously are not limited to a single motive. This comment about phones being "wallets" does fit with the idea of Apple being some sort of bank (or payment processor).

[1] https://www.youtube.com/watch?v=g1GgnbN9oNw#t=12977


Wallets is too limited though. Increasingly a phone is not only a wallet replacement, but also a replacement for filing cabinets, bookshelves, photo albums… to the point where having unfettered access to a smartphone is akin to having access to someone's living room and office.


> photo albums

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 just don't see it. Haven't we learnt over the last few years that consumers just don't seem to give a shit about their data? Conversely, even Apple not handing over keys to the FBI still doesn't put privacy-concerned folks like us at ease about an Apple Pay service (my peers and I, at least).

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.


I'm curious what your privacy concerns are regarding Apple Pay. Tokenized authentication seems notably more secure than any of the traditional card-based offerings. The seller only gets what you permit them to have, which in most cases is simply the token for the transaction to hit whatever card or bank account you have tied to it. The only reason merchants can ask for more, as far as I'm aware, is for shipping related purposes. If there's more to it though I'm certainly curious to know!


> consumers just don't seem to give a shit about their data?

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.


>I just don't see it. Haven't we learnt over the last few years that consumers just don't seem to give a shit about their data?

No, when it comes to their banking accounts and e-wallets, we haven't.


I was the initial developer on a system where the customers gave us access to their bank account and we would use their transactions to come up with (ultimately) an overall credit score.

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.


> username and password

That's fairly strong evidence of ignorance, not consent.


Every user of Mint is evidence to the contrary, no matter what their lips say.


Given access to your financial info to a third party is not the same as being OK with said party being insecure.


Say what? It adds yet another vector upon which you can lose control of your data. But that's not the original point anyway.

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.


In any case, not "giving a shit", and "not giving a shit AFTER your payment processor was compromised" is a very different thing.

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...


Explain Mint. And debit cards.

People are overwhelmingly happy to share their spending data for some convenience.


Explicitly sharing your data to a third party doesn't mean you're OK with them getting hacked and exposed to the internets, or getting to the wrong hands.


What if what it's really about is that Tim Cook values privacy more than his predecessor and thinks it's important that his products reflect that value?

Given his position and the overreaching request by the FBI, I think most of us privacy-conscious HNers would behave the same.


Apple becoming a bank makes some sense. It can start quite innocuous, with iTunes balances being integrated into Apple Pay somehow. Soon, allow transferring such credit between users. "Gift your friends iTunes credit right from the app."


It's an interesting line of thought but I feel like there is no indication Apple execs really think this way. It still seems to me like they think they're a consumer electronics company. Tim Cook and Jony Ive slavering over entering the financial industry, I just don't see it.

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 still seems to me like they think they're a consumer electronics company

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.


What does that have to do with becoming a bank or payments processor, though?

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.


Still, an executive can only do so much in a day and I imagine their time is used up on the electronics they make. The argument here is that they were literally thinking and acting as a bank in response to the FBI's actions.


They are into cars, too.


Yeah, that's what I said.


Which are essentially consumer electronics in 2016.


Putting on cyberpunk goggles, you could take the idea a step further and speculate that Apple is preparing to become a transnational entity, and doesn't want pesky nation-states dragging it down. They already have revenue around the GDP of Hong Kong or Israel.


The cyberpunk were wrong; the Internet has made nations stronger than ever. The NSA hacks Google and Apple, not the other way around.


Don't you get it, that's what they want you to think.


That already happened.


I don't think Apple will become a bank. They could however replace VISA and Mastercard in the long term, and grab the 2% to 5% of payment fee over each transaction. Vertical integration to its best. To get there, merchants need to support Apple Pay, and Apple needs to continue selling phones. In the near future, there will be more Apple Pay enabled devices in circulation than VISAs and Mastercards. When the scale tips, credit cards will be doomed.


2% to 5% for moving bits around, with a smattering of security and antifraud, is no way to run a modern payments system.

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.


Don't you need credit cards to use apple pay?


Sure, now. In 5 years who knows? I could definitely see AAPL partnering with visa/mastercard/amex or even directly with banks for direct account access on a program that doesn't require a physical card. Plastic cards will become the new cash (right now cash-only businesses are a little behind the times but they still exist) and phone payments will become the new plastic.


Partnering? Sure! I think this will be the way forward, but the GP says Apple is out to get VISA and MC (as companies) and will leapfrog them with one clean swoop. This will most definitely not happen.


Currently, yes. The article is positing that once Apple has the infrastructure in place for end-to-end transactions, removing the VISA/MC puzzle piece will be easy. Ultimately, you'd put money into an Apple account and spent it on your iPhone.


I don't think you are very familiar with how the payments industry works. Credit cards offer much more than a means to pay. Apple will need to double their headcount to compete with Visa. Or do you think that this is a feasible scenario?


I don't think so. The payment industry is over complicated and in my mind a real commodity. Apple is in a good position to simplify that.


No. The reason why Apple cares is because if everyone knew the US government could snoop on their messages and iPhone information at will, no one around the world would buy iPhones or Apple products again, due to the halo factor. It would be instant death. So Apple needs to tell the world that their information is secure from every government. Otherwise they will be out of business.


I fail to see the pitchfork-wielding crowd making its way to to the parliament of all western countries engaged in large-scale snooping (that is, most or all of them). Probably because people don't give a damn about the government reading their mail ("I have nothing to hide"/"Google is already reading it anyway").


>The FBI thought they were asking for a way to unlock a mobile phone, because the FBI is myopically focussed on past criminal investigations, not the future of the technology industry, and the FBI did not understand that they were actually asking for a way to tracelessly unlock and mess with every ATM and credit card on the planet circa 2030 (if not via Apple, then via the other phone OSs, once the festering security fleapit that is Android wakes up and smells the money).

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-...


Risk management: call me back when they figure it out

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.


>Because Apple wanted its system to have the simplicity for which it has become famous and wanted to make the sign-up process “frictionless,” the company required little beyond basic credit card information about a user.

>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.


This makes no sense. In order to act like a bank, Apple would have to track every financial transaction centrally in order to provide for auditing and reconciliation. There are already plenty of laws that give law enforcement the power to subpoena that info. Strong device security is no impediment at all if Apple is a bank.


Not if they put crypto currency wallets in there.


>Early iterations of the iPhone notoriously lied about the security of SSL connections to email servers; my understanding is that this led to them being banned from some corporate and government accounts for a few years.

What? Never heard about this. Is he bullshitting about this or is there some validity behind this claim?


I found a number of articles referencing this IOS 4.2 SSL vulnerability. http://www.peterbance.co.uk/information-security-articles/ss...

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...


None of those links address the claim about SSL and email. And iOS4 is not an "early" iPhone.


I wanted to come back and say I was too quick to judge on the vulnerability article.

This data doesn't indicate whether bugs were found and patched internally, or were actually exposed first by malware.


As much as I like Antipope, I think he is overestimating the long term thinking of the Apple business because the time to have started the "Apple Bank" process is 2014 because they should have just acquired Simple:

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.


If the FBI get what they want, then the back door will be installed and the next-generation payments infrastructure will be just as prone to fraud as the last-generation card infrastructure, with its card skimmers and identity theft.

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.


Look I dislike that kind of hyperbole also. But I think there is a clearly defined middle step. If the FBI can force Apple to create a new OS. They can force them to install backdoors in every new OS. Then the phones become "...just as prone to fraud as the last-generation card infrastructure."

And given Juniper systems was likely a government placed backdoor, there is ample evidence this is true.


Probably more related to the concerns that a judge would compel Apple to turn over their source code and signing key to software, which basically gives the government and any agent with access unlimited authority to tamper with Apple software and devices. Cracking passwords is also bad.


>> Their phones are, in many respects, more secure than the ATMs and credit card infrastructure we've used to accessing our bank accounts.

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.

_____________________

[1] Read: it's only a matter of time.


Apple has an obligation as a financial institution to win this case. Apple is a business, and it has customers who won't want to buy phones which they know are purposefully compromised from a security standpoint. In addition, those customers don't want to buy phones for which the US government has unlimited access to. Apple has a financial interest to keep their devices as secure as possible and act in the interests of their customers, the ones who drive their business.


I completely understand why Apple is not backing down on this. Even if this backdoor is for one phone, the possibility of having that backdoor stolen is too great a risk to produce. When looking at the big picture, Apple is looking at the side effects this backdoor could produce and doesn't want to take the risk. I can hardly blame them either!


seems to me the risk of having the backdoor stolen is an overstated vulnerability. Isn't it the same risk as having the iphone source code stolen? Hasn't happened yet has it? If the source code were stolen, someone else could engineer a backdoor. I don't think the overall security risk increases by the existence of a backdoor on a single phone. Amiwrong? That said, I'm happy that Apple is pushing back, but let's be clear about the technical facts.


To be clear about the technical facts: good luck pushing that engineered backdoor to an iPhone without Apple's keys.

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


It seems more likely Apple wants leverage over banks to cut exclusive deals in order to sell more devices.

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.


It's too far fetched esp given a very simple incentive exists for Apple to be pro-privacy - market differentiation.

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.


> Its legendary $120-150Bn in cash

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.


This makes sense to me at a high level. A bit too wordy for my tastes but yes, if I were Apple I'd want to be super secure in part because I want to be big player in the payments arena.

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.


There are many theories in this post, but no facts.

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?


I think the author is saying neither of those things, but that bank software is pretty much uniformly rooted in the stone age, updates come at a glacial pace, and Apple could use its significant software engineering prowess to build something substantially better.

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.


Not just Apple Pay or being a bank, also about health data and about being trusted in other markets than United States. Good article, though.


Apple Pay sits on top of the credit card industry. Do you believe they will remove that layer one day, and tie directly to your bank account? As I understand the payment industry is incestuous and has become a commodity. Its ripe for anyone to replace it. Apple seems to be in a good position to do that over time.


I don't know why they would bother.

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.


Credit Cards, issuers, acquirers, gateways, etc - the whole payment intermediary grabs around 3%. Most of that could all go to Apple one day. Why leave it on the table?


I think Rogers in Canada has already done that, haven't they? It might be hard, but it is not impossible to get a banking licence, if you have the money for it.


Apple doesn't have to become a bank. There is a lot of money to be made sitting between the bank and the customer (2%~5% of a transaction). Today, VISA and Mastercard grab most of that. Apple could replace them. In a few years, there will be more Apple devices with Apple Pay than issued VISAs. When Apple Pay is accepted everywhere, credit cards will be doomed.


What is the purpose in speculating the one true reason that Apple is doing this? They're a massive company with many needs and desires, so there are probably many interlocking factors here. Chasing the simple narrative is a very human game, but it's not really purposeful, it's just play.


This doesn't add up. The biggest asset that the US TBTF banks have right now is their tight relationship with the federal government.

Apple could certainly start competing on their home turf with respect to payments and checking accounts, but there's very little profit in that.


I think the premise of following money is interesting, but the conclusion I completely disagree with. I believe Apple's focus on privacy is a direct challenge to Google's business model. Apple makes all their money from mobile device sales, don't they?


But maybe the growth in the phone business is limited - so they look for various services like music/tv, and banking could be one such service.


> unlike the banks and the credit card settlement network they're not running on incrementally upgraded legacy infrastructure designed in the 1950s

Good point, Apple's incrementally upgraded legacy infrastructure was designed in the 1990s.


Hm... An article with no concrete proof.

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.


except the FBI changed course, not only saying that the iphone was hackable, but that it was hackable by groups other than the government, which, if someone valued their privacy, they would probably find that statement concerning


Around 2030 there will likely be a quantum computer running Shor's algorithm efficiently.


I think Apple's motivation to maintain security a lot simpler. Apple had to demonstrate to the Chinese government that its devices were secure and could not be used to spy on Chinese users. If Apple gives up on that, they'll lose those sales.


Apple is already operating a private hedge fund to deal with their excess capital.

https://en.m.wikipedia.org/wiki/Braeburn_Capital


1. Regulate market capitalization 2. Tax corporate revenues


this in no way effects whether one is trusted for payments.


TL;DR: Apple wants us to trust them, because they want to build a bank.


Actually, go read the article. It's worth it, and has much more nuance than this.


It is about our freedoms and we've got to defend them!


FBI only needs Apple signing keys. And as lavabit showed - they can compel Apple to produce them.

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.


That's incorrect. The major US banks today do not primarily make their money from either gambling with the wealth of rich people, or from low income banking. Not even remotely close.

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.


> That's incorrect. The major US banks today do not primarily make their money from either gambling with the wealth of rich people, or from low income banking. Not even remotely close.

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/


The elephant in the room is we are building a new religion based on technology.

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.




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