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The Almighty Buck

Feds Rule PayPal Is Not A Bank 228

dthable writes "CNet has posted an article update describing the Feds latest ruling - PayPal is not considered a bank. The article describes the effects of not being a bank which includes the lack of government regulations."
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Feds Rule PayPal Is Not A Bank

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  • by joshjs ( 533522 ) <joshjs&cs,uwm,edu> on Thursday March 14, 2002 @01:16PM (#3163015) Homepage
    PayPal is not a *good* bank. =)
    • I like paypal.

      I've used the service for probably close to a couple years. I've used to to send and receive money for ebay auctions, I've used to it transfer money between myself and friends, and now I've even got their MasterCard version of the visacheckcard (it works like an ATM or a mastercard, but draws from my paypal balance and doesn't actually have a creditline (and is not a creditcard)). I transfer a bit of money from each paycheck I get into paypal, and use my paypal card for a lot of day-to-day expenses like fuel and so on. I really like paypal.

      They've never fucked me, and they've never fucked anyone I know, or anyone who knows someone I know. They have, allegedly, fucked some people I don't know, however. But I'm skeptical of the claims of frozen accounts; I'm sure it's happened on occasion, but I don't think the messageboard posts I read told the whole story. All the same, it's made me paranoid enough to not keep any large ammounts in my account, but to me the convenience of their unique service makes the slight risk of a small ammount of funds worth it. And until I see some solid proof of wrongdoing, I'm going to go on believing they're an OK company.

      So bravo for the (possibly) beneficial "not a bank" ruling from the FDIC. I hope the states follow suit.
      • Be careful... (Score:3, Interesting)

        by BLKMGK ( 34057 )
        I too haven't been hosed - yet. However their per transaction fees are beginning to get onerous. Frankly from your description of how YOU are using the service it does sound to me a nawful lot like a bank. An electronic one that never handles paper money to be sure but a bank nonetheless.

        Try this, have someone send you money using PayPal and a freshly stolen but not yet reported-stolen credit card. After you've received the money have the card reported stolen. what what occurs to YOUR account even though you weren't involved in the theft. By all accounts YOUR funds and those of the person who sent you money will BOTH be frozen. Ouch.

        For fun try this - goto PayPal and try to find a phone number that will lead you to a real live living human being that can help. It used to be, and migh still be, somewhat hard to find a phone number on the site. I tried something over a year ago whe nstories first seemed to be filtering out about problems with the service and had a hard time fincing a number. That did NOT bode well IMO.

        I DO use the service, somewhat often (sent the roller coaster guy money today:-) BUT I do NOT keep money in there. These guys are apparently being ruled "not a bank" so protections I'd expect from such a thing don't exist never mind the crap they supposedly pull. They're just too shaky for me to trust using them as you do - I've got credit cards and debit cards for insured accounts already thanks. YMMV - just please be careful and wary. Claims of thousands of dollars being frozen are WAY too common IMO...
  • No FDIC insurance? (Score:2, Insightful)

    by awilber ( 134745 )
    Does "not a bank" mean "not insured by FDIC"?
    • by Bob(TM) ( 104510 )
      Yes, among other things.
    • by j-turkey ( 187775 )
      It doesn't matter -- because with PayPal, users are not depositing money...they're a transfer service. AFAIK, FDIC doesn't necessarily insure money transfers, only deposits.
      • because with PayPal, users are not depositing money

        You're incorrect. When you have a PayPal balance on the account when someone paid you, it is essentially a deposit in their system, as it's not in any of your other accounts. In fact, PayPal even wants you to earn an interest on this deposit. So it is not a money transfer in all cases.
        • As I read it you do not have an account with PayPal at this point. They appear to be putting plain funds into a real bank account with some partner bank. They also offer a Money Market securities product.
          Who manages the Fund? PayPal partnered with Barclays Global Investors, one of the world's leading institutional money managers, to manage this Fund. With more than $700 billion in assets under management, BGI manages the Master Portfolio in which our Fund invests as well as the money for 1 in 4 Fortune 500 Corporate list companies and 100 of the largest pension funds in the world.
          Which looks to me like maybe the SEC should be taking an interest-- even if their disclosures are in order, I have to wonder if they have the appropriate licensing to sell equities. I also note that at least one state consider them to perhaps be operating an unauthorized transfer service. So maybe they'll get stomped on after all. Of course, it does appear that their main problem is convincing regulators they'll fly straight in the future. Obviously when they were small fish, nobody was paying attention. Will they be allowed to keep the gains they've made as a result of running an unlicensed operation?
      • FDIC doesn't necessarily insure money transfers, only deposits.

        This is true, but at the bottom of the article, it states that PayPal inquired about FDIC protection. They have recently begun depositing the money they receive for transactions into accounts in an FDIC-insured bank. The FDIC responded to their inquiry with an advisory letter indicating that the amounts deposited would indeed be insured up to the standard $100,000 per customer per bank. This would mean that as long as PayPal opens a separate account for each customer, they should be insured. Note that it would probably NOT insure money "lost-in-transit."

    • by cperciva ( 102828 ) on Thursday March 14, 2002 @01:21PM (#3163050) Homepage
      Does "not a bank" mean "not insured by FDIC"?

      From the article:

      As of this quarter, PayPal began depositing customer balances into FDIC-insured bank accounts. The company had asked for an opinion from the FDIC on whether it could pass the insurance protection on to its customers. In its advisory letter, the FDIC said the insurance protections--up to $100,000 per customer per bank--would extend to PayPal customers, even when PayPal deposited the funds for them, PayPal said.
      • by Anonymous Coward
        So when I do my taxes next year, I'll just ignore my paypal balance, because it's more or less in limbo, unclassifiable.

        That doesn't sound quite right.

        • by ergo98 ( 9391 )
          When you do your taxes you have to list your assets? This is actually a serious question: Do you not just list income and expenses, and latent assets are irrelevant?
      • by Jinky ( 565098 )

        I believe what he meant was that by the not insured by FDIC was that if PayPal was continuing to hold the funds, it does not seem that it would be insured, as they are not classified as a bank. Now that PayPal is depositing the funds into FDIC insured accounts, those user balances are insured.

      • by markmoss ( 301064 ) on Thursday March 14, 2002 @02:00PM (#3163286)
        So once Paypal has deposited the funds into a bank, they are insured. However, if someone at Paypal takes off to Rio with all the money, leaving Paypal bankrupt, you are scr*wed.

        Think that's an impossible scenario? I remember a payroll-processing company where that is almost exactly what happened, almost 30 years ago. The company president disappeared, $5 million was missing, eventually they found his airplane at a remote airstrip in Venezuala, but they never found him.
    • by Ec|ipse ( 52 )
      Correct, in order to be insured by FDIC the way a bank is insured, the company would have to classified as a bank. But, according to the article, if PayPal deposits a users money into an ACTUAL bank, then the money will be insured by FDIC.
    • well, the whole "not insured by FDIC" written all over the site does...
  • by Anonynnous Coward ( 557984 ) on Thursday March 14, 2002 @01:20PM (#3163039)
    . . . a bank based on the "duck test." It accepts deposits, it pays interest, it earns money on cash on deposit, it clears transactions, . . . About the only thing it doesn't do is hold itself accountable to the standards that should be expected of a bank.

    Also, note that this doesn't get it out from under the couple of states that (correctly) think PayPal should be regulated like a bank.

    I don't know what kind of crack this court was on, but it must have been some good stuff.

    • by Bob(TM) ( 104510 ) on Thursday March 14, 2002 @01:22PM (#3163062)
      Wasn't a court - it was the FDIC. And all they said was, "it doesn't look like a bank to us, but the states should decide for themselves."
      • Ah, so the FDIC doesn't want to have to insure them. I wouldn't, either!
        • Ah, so the FDIC doesn't want to have to insure them. I wouldn't, either!

          This is a false statement by someone who did NOT read the article. PayPal IS insured by FDIC. In fact, PayPal even asked the FDIC their opinion on the matter.

          From the article:

          The company had asked for an opinion from the FDIC on whether it could pass the insurance protection on to its customers. In its advisory letter, the FDIC said the insurance protections--up to $100,000 per customer per bank--would extend to PayPal customers, even when PayPal deposited the funds for them, PayPal said.

          • PayPal IS insured by FDIC.

            This is a false statement by comeone who did NOT comprehend the article. PayPal IS NOT insured by the FDIC. PayPal claims and the FDIC has not refuted the idea that PayPal's INDIVIDUAL CUSTOMERS are insured when AND ONLY WHEN PayPal deposits their funds into an FDIC insured account, i.e. ONE IN A REAL BANK!

            Are you just one of those bitter cretins that are jealous that someone smarter than you made an observation?

            • Are you just one of those bitter cretins that are jealous that someone smarter than you made an observation?

              I'm sorry, I should have been clearer. I was only refuting the parent post's comment that FDIC ruled that PayPal is not a bank just because it doesn't want to have to insure PayPal accounts. I was just stating that the FDIC knows that even though it rules PayPal is not a bank, that in the end they still are insuring some of the money that PayPal is holding and that idea had no bearing on the decision to state PayPal is not a bank.

              You are right that the FDIC does not insure PayPal, just many of the bigger PayPal accounts.

    • it earns money on cash on deposit

      Actually, it doesn't. I have a few bucks in my paypal account that are not earning interest - mainly because I don't want to become verified and give PP access to my bank account. You can have paypal put your money in a money market account (which may earn or lose $). From the prospectus [paypal.com]: note - you have to login to see this page

      Although the Fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the Fund.
      • Just because you're not earning interest on your money in PayPal doesn't mean they aren't.
      • Actually, it doesn't. I have a few bucks in my paypal account that are not earning interest

        Uhm, that's not what the poster meant. PayPal uses the money *YOU* have on deposit with them, invests it, and earns interest on that investment.

        Therefore, they use YOUR money to invest, keep the interest, and give you none.

        Hence, they earn money on cash on deposit.
    • by dhogaza ( 64507 ) on Thursday March 14, 2002 @01:48PM (#3163222) Homepage
      Banks loan money and that's where they primarily make their money. PayPal's business model isn't at all like a banks and it is reasonable that they're not treated like a bank.
      • No longer true... (Score:5, Insightful)

        by schmaltz ( 70977 ) on Thursday March 14, 2002 @03:16PM (#3163722)
        Banks loan money and that's where they primarily make their money.
        If only this were true, we'd live in simpler times. Banks make much more of their profit in two other areas: investing your deposits in securities and derivatives [nytimes.com], and interest during slack time, the time between when you've made a deposit, and when the funds actually become available.

        So, Paypal has the same opportunity to make profits with your money the way banks do, by investing it. This and their poor customer service says to me they're a bank.

        (Amazing that in this age when all banking systems are interconnected that your transfers and deposits can still take up to a week... that's something the banks didn't want written out of the system during the last revision of banking laws.)
        • So, Paypal has the same opportunity to make profits with your money the way banks do, by investing it.

          Sounds like an insurance company too, doesn't it? They keep a "float" of other people's money until they need to pay something out (ie, a customer withdraws their money). The rest of the time they have the money to play with.

          I think I agree with the FDIC, PayPal is NOT a bank. But they DO need to be regulated. They need to be regulated as a "payment service". If the regulations haven't been written yet, somebody needs to do it.

    • I think you may have taken the implications of the ruling a bit too broadly. The court is only declaring that since PayPal is not a registered bank, its customers should not expect and do not inherently have the legal protections and procedures afforded to bank customers. If you ask me, it's a good thing, because it points directly to the next step that government regulators and legislators need to take: define the type of instituation PayPal is and write consumer-protection laws. Not to mention possibly doing what Louisiana did and put them out of business until consumers are protected.
    • . . . a bank based on the "duck test." It accepts deposits, it pays interest, it earns money on cash on deposit, it clears transactions, . . . About the only thing it doesn't do is hold itself accountable to the standards that should be expected of a bank.

      Which PayPal really doesn't do...

      They are what is known as a clearing house. Basically they do in proxy for other institutions. This is what I said last time this came up. Seems, while the Fed's didn't state it as such per se, they seem to feel the same way.

      Now then, are they a "wire" service...sounds like...and as such, some states are going to make them become licensed money transfer services...which is more or less what they are doing.
    • by mbrubeck ( 73587 ) on Thursday March 14, 2002 @02:25PM (#3163425) Homepage
      . . . a bank based on the "duck test."

      What, if it weighs the same as a duck, then it's a bank... and we can burn it?!

    • If you want paypal's phone number (posted on here, but no-one seemed to care) its 888-221-1161 - and yes if you push enough buttons you will contact someone.
    • Your reference to a common saying assumes something that Everybody Knows -- all ducks quack. Suprise! Everybody is wrong [cyborganic.com]!

      You're taking it as a given that the functions of a bank are obvious, and that any institution that replicates these functions is also a bank. But lots of non-banks do bank-like things. Mortgage brokers, insurance companies, pawn brokers, assurance bond companies, wire service companies, re-insurance pools... The differences are obscure, but they are recognized by law.

      If you compare PayPal with all the different pre-Internet financial institutions, the closest analogy would seem to be wire services, like Western Union [westernunion.com]. These don't actually do anything that banks don't do (though they do handle small transfers more cheaply and conveniently than banks). But they are not considered banks.

      Here's one important difference between Western Union and PayPal. To do business with Western Union, all you need is a pile of cash and someone to send it to. But there aren't any PayPal offices where you can send or receive payments. In order to do business with PayPal, both sender and recipient must have an existing bank account! I suspect that requirement separates PayPal even further from banks in the eyes of the FDIC.

  • by SkyLeach ( 188871 ) on Thursday March 14, 2002 @01:22PM (#3163058) Homepage
    "'As long as we continue doing what we are doing today, we won't be subject to Federal banking laws,' said PayPal Chief Executive Peter Thiel."

    These guys really need to back down and start telling people how they will fix the numerous [slashdot.org] complaints [slashdot.org] about their service [paypalsucks.com] instead of acting so arrogant, IMHO.
  • what are they then? a Credit card compny? Perhpas, for our safty, they should regulate, or at least clearly define paypal. Is e-gold considered a bank www.e-gold.com? they have online pay services, but they also have hard currency. I guess so. Anyways, what is Paypal??
  • WTF? (Score:2, Insightful)

    by Lxy ( 80823 )
    I've seen the complaints on /. and all the other sites out there. Where does this notion come from that they ever WERE a bank? I use Paypal to send and receive credit card payments. As soon as the money hits my account, I take it out. Why would I expect Paypal to FDIC insure it? Or to give me interest? or any of these other services?

    That being said, I think Paypal has some shady stuff going on so I will discontinue the use of their service.
    • Re:WTF? (Score:3, Interesting)

      You just answered your own question didn't you? If they never touched the money, they wouldn' be a bank. But they DO hold the transaction in their own acounts for weeks and sometimes months before transferring to your account. That's banking (Or at least Escrow) and in either case, since they are dealing with money they do not own, they should be regulated. Or otherwise "shadey" stuff is perfectly ok as long as most people don't find out about it.
    • people, in general, think most things that deal in money are banks. Thisnis not true, but there you have it.

      plus, there are specific guilines in what a bank is, and point in fact they don't have to give you most services you would expect to be considered a bank. there are banks that done have any "storefronts" that you would expect, they deal in big dollars, lending money to countries, or bailing out other banks, etc...

  • Because until the internet, there was no way you could build paypal. (Well maybe over the phone, but that would be much more difficult) Because the internet allows paypal to have virtual presence wherever there is net access, and has no physical presence. You cannot goto the paypal headquarters and deposit your money into your paypal account. The laws are just not setup to deal with this kind of business yet. A bank without a physical point of presence is not covered by any of todays laws (correctly). It'll probably be awhile before the lawyers figure out what Paypal and services like it really are.
    • virtual presence wherever there is net access, and has no physical presence. ...The laws are just not setup to deal with this kind of business

      Nonsense. Paypal doesn't exit in the ether, it exists at 6201 15th Avenue, Third Floor, Brooklyn, NY 11219.

      Egg [egg.com] are an online or telephone-only set up too, but they are governed by laws. So are Smile [smile.co.uk] and IF [if.com]. PayPal aren't in a unique situation.

      Cheers,br Ia

    • What an interesting point of view. You say that if laws don't cover that type of business, then they don't have law on their side. Whereas I would say that if laws don't cover that type of business, then they don't have law against them.

    • Now the question is, what is MoneyGram [moneygram.com] (the wire transfer service). Isn't this to some effect what PayPal does? They allow people to send money to each other and hold it until the recipient picks it up. The regulations that deal with this type of service should be used on PayPal also.
  • by LuxuryYacht ( 229372 ) on Thursday March 14, 2002 @01:32PM (#3163123) Homepage
    More about this story at:

    NandoTimes [nandotimes.com]

  • Paypal has no one to blame but themselves for the current investigation.

    It wasn't until PayPalSucks [www.paypalsucks] and PayPal Warning [paypalwarning.com] became well-known and the horror stories became more abundant that Paypal found itself in the sights.
  • GEN-DEX Bank (Score:4, Interesting)

    by rnd() ( 118781 ) on Thursday March 14, 2002 @01:40PM (#3163173) Homepage
    Anyone ever hear of Daniel Lexington? He originally sought programmers [monkey.org] to build a personal electronic organizer. Along with the plan to build the organizer was the need to create an offshore bank, dubbed GenDex Bank.

    Before long, he was sought after [monkey.org] for other reasons.

    Daniel has also created some articles of government [gen-dex.com] and a logo [gen-dex.com].

    It is interesting to see how fate chose PayPal over GenDex, at least thusfar.

  • Paypal Warning! (Score:5, Informative)

    by LuxuryYacht ( 229372 ) on Thursday March 14, 2002 @01:50PM (#3163231) Homepage

    Your Paypal account can be frozen at any time, without advance notice leaving you without your money for weeks (if not forever), and there isn't much you can do about it.

    Paypal Warning [paypalwarning.com]

    • As an anecdote relating to this:
      My little brother was doing a lot of business on Ebay and using Paypal for a lot of it. He sold some stuff, and got paid 600$ for it, directly into his Paypal account, he then took the 600$ out to pay for other stuff. A few weeks later Paypal sends him an e-mail saying that the 600$ he got might have originated from a fraudulent source, as a result they claimed he owed them $600. Luckily he had already taken the money out, and he immediately notified his bank not to let them take any action against his bank account and blew them off. But if he had been a few days slower taking his money out he would have been out $600!

  • I went from putting the sentence: "Paypal preferred" in my auctions on eBay when they used to offer a free service to individuals to the sentence: "I won't accept Paypal." And I know that I am not the only one out there moving away from these thieves. The fact that I get charged outrageous fees by these guys who lured me with there $5 coupon at the beginning is just intolerable. I understand the fact that they need to charge something to exist, but there are limits to what they can do.
    Unfortunately, refusing paypal puts the burden on the buyers who have to wait for their check to clear up or take the time to send a money order. What are the other companies I could use beside paypal for my auctions?

    PPA, the girl next door who says "Screw Paypal"
  • by carlhirsch ( 87880 ) on Thursday March 14, 2002 @02:02PM (#3163298) Homepage
    From PayPalWarning.com...

    PayPal, Inc.
    11128 John Galt Blvd
    Omaha, NE 68137

    Subdivision planners reading Ayn Rand, apparently...


  • Banks (Score:4, Informative)

    by joss ( 1346 ) on Thursday March 14, 2002 @02:03PM (#3163304) Homepage
    The main point of being a bank, is that banks are allowed to invent money.

    Everyone knows about bank notes and coins, they are minted by the government. However, this is only a small fraction of the money in circulation - around 4% in most big economies. Most money is in bank accounts of one sort or another and circulates through cheques, debit cards etc. Cash is a minor part of the money supply and becoming less important by the day. So, where does most money really come from ? The answer is very simple: money is invented by banks when people take out loans.

    This is not a secret, it's just not widely known. Most people think that banks lend you other people's money and charge more interest to borrowers than the lenders receive, but this picture is fundamentally wrong. If you borrow £5000 from the bank, nobody is sent a letter saying that their money is temporarily unavailable because they have lent it to someone else. A more accurate picture is that this £5000 didn't exist until the bank lent it to you.

    This is hard to believe, so let me show you how it works. It simplifies matters to imagine that there is only 1 bank, or if that strains your imagination, just imagine that A,B and C all bank with Wells Fargo.

    Let us start with people A,B,C and a bank and keep track of how much money they have. The bank keeps separate accounts for A,B,C and itself

    1. We'll start everybody off with no money, and nothing in their bank account
    except for C who has $5000
    External funds A: 0, B: 0, C 5000
    Bank a:0 b:0 c:0 bank:0

    2. C pays his money into his bank account
    External A: 0 B: 0 C: 0
    Bank a:0 b:0 c:5000 bank:0

    3. A asks to borrow from bank so it breaks A's account of 0
    into $5000 of money for his current account and a debt of -$5000
    External A: 0, B: 0, C: 0
    Bank a:(5000,-5000) b:0 c:5000 bank:0

    4. The bank transfers the money to A
    External: A: 5000, B: 0, C: 0
    Bank a:-5000 b:0 c:5000 bank:0

    5. A pays this money to B
    Exernal A: 0, B: 5000, C: 0
    Bank a:-5000 b:0 c:5000 bank:0

    6. B pays the money into his account
    External A: 0, B: 0, C: 0
    Bank a:-5000 b:5000 c:5000 bank:0

    7. A obtains money from elsewhere (easier said than done)
    External A: 5500, B: 0, C: 0
    Bank a:-5000 b:5000 c:5000 bank:0

    8. A repays 5000 to bank, plus interest of 500
    External A 0, B 0, C 0
    Bank a:0 b:5000 c:5000 bank:500

    9. The bank pays some interest to C
    External A: 0, B: 0, C: 0
    Bank a:0 b:5000 c:5300 bank:200

    So far, the bank has done nothing strange, and this actually corresponds to the understanding that most people have about the way banks work. One thing to notice is that when A received $5000, nothing happened to C's account. Theoretically C could withdraw his money at any time.

    The clever bit is that step 4 never needs to actually happen. A doesn't remove $5000 in cash from his bank - he just writes a check out to B, who never takes out the money either - he just pays it into his account. So in order to "lend money" to A, all that the bank needs to do is change it's accounts from saying:

    Bank a:0 b:0 c:5000 bank:0

    to saying:

    Bank a:5000,-5000 b:0 c:5000 bank:0

    Which means: A has $5000 in his current account and also has a debt of $5000 in a separate account.

    and as far as A is concerned he has borrowed $5000 from the bank.

    But there is nothing to stop the bank from "lending" lots of people money in this way. Why not lend D $5000 too, just change the accounts to say:

    Bank a:5000,-5000 b:0 c:5000 d:5000,-5000 bank:0

    The money that it lends out does not have to exist before it lends it out - the bank invents the money. In fact, almost all the money in circulation has been invented in this way.

    Are banks allowed to do this - isn't there a law against this ? No, not at all, banks are expected to do this - in fact without the banks providing credit, the money supply drys up and the economy goes into recession. There used to be laws specifying a limit - banks could only lend out X times as much money as they received, but these laws have been scrapped in most modern economies. The only constraint is market confidence. If people start to lose confidence in the bank, too many people demand to physically get their hands on their money at the same time, then the whole facade comes tumbling down.

    The central misunderstanding is that banks charge interest because they themselves are borrowing money from somewhere, as in fact they are if the money actually leaves their control. Banks compete with one another to lend you money because it is their principle source of revenue. They compete by charging less interest. If they charge too little, lend too much to people who have trouble paying it back then people lose confidence, and move their funds to another bank, the bank goes bust. They lend as much as they dare though, because it's immensly profitable: they are inventing the money they lend you.

    So, money is created by banks in the form of debt. Now, lets think about this a moment. What would happen if everybody tried to pay off their debts to the banks, and nobody took out new loans. Well, the money supply would dry up, there would be far less money in circulation. Money's primary function is a to facilitate trade, if nobody has any money then nobody would be able to trade, the economy would grind to a halt.

    More fundamentally, it is absolutely impossible that all debt could be paid off. THERE IS MORE DEBT THAN MONEY. It's easy to understand this when you think about where money comes from. Every time a bank lends people money it increases the gap between the amount of money in the world and the amount of debt. The bank lends you $5000, and demands you repay $5500. $5000 is temporarily added to the amount of money in circulation, but it must eventually return to the bank - plus an additional $500 that must go back to the bank too. When the debt is finally paid off, $500 more must have been extracted from the system than went into it. The only way to keep the system going is with increasing debt. Of course, banks spends money too - they have employees and shareholders who buy cars and houses, yachts etc, this pumps money back into the system, which slows down the debt spiral. (A very fat, and almost entirely parasitical segment of the economy that creates nothing real, but that's not my point). Even if the bank spends all the money it receives in interest, there is still a discrepency, because the money must be returned to the bank before it can spend it - at any one time there has to be more debt than money.

    The value of our assets (in money terms) is proportional to the amount of money existing. Our debts to the banks are in terms of money. As credit collapses, the amount of money goes down, the "value" that people put on real items goes down (nobody can pay much if they don't have much money). If banks suddenely refused any further loans the banks would end up owning everything. (In fact - I strongly suspect that one or two of the biggest banks would end up owning everything, including all smaller banks). Nobody would have money to pay off their debts and the money they could obtain from selling their assets wouldn't cover it - not enough money would exist. The banks would own all the money AND all the property. This is not just a theoretical problem, it's an exaggeration of what happens during recession. Extending it to the logical conclusion highlights how much power lies with banks in the current system.

    When banks lend people money, they increase the amount of money in circulation. This changes the balance between the amount of money in the world and the amount of stuff in the world. This slightly decreases the value of all money - it is the root cause of inflation. Effectively banks steal money off everybody else by lending out more money than they have. It's just a form of legalized forgery. A private individual would have exactly the same effect on the economy if he produced perfectly forged money that he was allowed to add to the system on the condition that he removed and destroyed the same amount at a later date.

    An expanding economy needs an ever increasing amount of money. The more stuff in the world, the more money is needed. This money is invented by private banks in the form of debt. Even governments borrow their money from private banks. So we have this paradoxical situation where the most successful countries have the largest amounts of debt. Amazingly the USA has recently been able to start decreasing it's national debt, but this has been achieved by a massively expanded amount of private sector debt. People are more confident, they believe their shares are worth more, they borrow more money and invest more. More is collected in taxes due to increased wages, and for a short time the government debt can decrease, but overall debt always increases.

    During boom times - the credit supply increases. The system keeps afloat by ever increasing amounts of debt. In order to service this debt, the economy *must* expand - it is completely impossible for the monetary system to stay afloat with a stable economy, because the only way the debts can be serviced is by creating new debts.

    Obviously this debt cycle cannot quite go on forever. At some stage people lose confidence, and it becomes harder to get credit. Then businesses go bankrupt, banks foreclose on the assets, and we go into recession or depression. Then gradually things improve and we start over again - the only difference being that now more of the actual assets in the world (rather than just the money), are then owned by the banks.

    So the boom/bust cycle is inevitable when all money is created in the form of debt. The system is inherently unstable. We end up with rather large debts. For instance, the national debt of USA is $5,673,018,308,921 (last time I checked). The estimated population of the United States is 276,004,098 so each citizen's share of this debt is $20,554.11. The money to service this debt is extracted (taxed) with menaces by the government and paid to the banks. If you wanted to be alarmist about it, you could say we are selling our children into slavery (or at the very least indentured servitude) to the owners of the private institutions that invent our money.

    Whose idea was this wonderful mechanism for inventing money ? Amazingly enough, it was the bankers. In 1694, Britain's King William was having trouble with money and probably did not understand it too well. At the time governments were scratching their heads over how to pitch the speed of money supply to the economy so as to avoid periods of inflation and at the same time finance their wars, build their palaces and even, from time to time, make life bearable for their people. The bankers convinced King William that the bankers were the "experts" who understood money and that the job of issuing currency should be handed to them.

    As the amount of stuff in the world increases, the amount of money needs to increase. An artist paints a picture and wants to sell it - the amount of stuff in the world has just increased. Either: more money has to be created everything; the price of everything needs to reduce slightly; or we have a world where their is plenty of stuff, but nobody can buy it. In fact, this is pretty much the situation we live in: there is plenty of stuff, but everyone is short of money.

    Letting the banks invent all money in the form of debt is not the only possible system. For instance, the government could invent money and give everybody a certain amount each year. This scheme was advocated by Douglas in the 30s and was making progress before war broke out. The introduction of more debt free money into the economy would reduce the need for loans and gradually eliminate the boom and bust cycle. Of course if the government invents too much we end up with inflation. But we have inflation already because the banks are inventing money all the time. If people were given money, they would borrow less from the banks so we wouldn't need inflation. A lot of inflationary pressure comes from the need to make interest payments. This scheme is far less inflationary than you might think.

    The reason that the current system (where money is invented by banks) has become dominant is that the current monetary system is pretty good at creating a vibrant thriving economy where enterprise is encouraged and financed - it undeniably encourages growth, in fact, it can't live without it. A stable economy is absolutely impossible in the current system, people must be perpetually taking out loans and investing. Without constant investment and new loans the money dissappears and we sink into recession. That's why the idea has spread so wide - it's the most competitive model so far seen.

    It's not exactly perfect though. The tendancy to enslave populations into the service of bank owners is one flaw. An insatiable need to expand economies until the whole planet is covered in concrete is another. The necessity for people to work like mules their whole lives, scraping a living amongst plenty when automation should provide us with leisure is another. The maintenance of a huge parasitical segment of the economy that creates virtually nothing of value is another... I could go on, but I think you see my point - the current system is not ideal.

    One good thing about the current system is that the wastefulness of private institutions is bounded by the fact that if they become too bloated, corrupt and stupid then they go bankrupt. Governments don't have the same market-place correction. Elections change the spokesmen, but the permanent institution that grows up behind our "elected representitives" is much harder to displace. It can reach far greater levels of stupidity and incompetence than is possible for private organisations. But the market place competition between banks doesn't help us much. When banks fold they get taken over by other banks. Banks have an even greater motivation to merge than other businesses - the larger they are, the less likely that money ever leaves their control, so the larger their possible debt/credit ratio. What this means is that larger banks can invent more money than smaller banks, thus stealing more from the rest of the world. The fact that stupid banks get taken over by clever banks doesn't help. It just makes the resulting mega banks more powerful than ever.

    You can't really blame banks - they are just making the most of a preposterous situation. It should be the responsibility of government to create the money we need and distribute it amongst us. Counter-intuitively this would make governments less powerful. The present system gives them the power to do whatever they like, or more accurately the power to not do whatever they like. They control the
    rate of the economy by controlling interest rates. They can obtain as much money as they want by increasing the national debt, and they can avoid doing things that people want by just saying they can't afford it.

    An intelligent and informative book that explains this stuff and related ideas quite thoroughly is "Grip of Death" by Mike Rowbotham, Jon Carpenter Publishing; ISBN: 1897766408

    • Re:Banks (Score:5, Informative)

      by Anonymous Coward on Thursday March 14, 2002 @03:44PM (#3163854)
      Hey /.! Hire this guy to replace Katz! This is the longest miss-construed rant I have seen yet.

      Banks must keep a certain percentage of all "deposits" in the bank so pay for withdrawals. If they didn't, people would lose confidence, panic and pull out all their deposits and it turns into a rush to pull out the money. This is why the FDIC was created - to tell citizens their deposits are guaranteed federally, so there is no need to get your money out before others do.

      Now, as for lending, again banks must balance their books. They borrow the money from another bank. Only at the top level (the Federal Reserve), is money "made up" per se - and this is per the directive of the Federal government. If too much money is "made up", it loses value, and inflation happens (supply & demand where money has too much supply). Alan Greenspan is presently responsible for monitoring this process, upon a board of recommendation from the FR. Last year, companies slowed down borrowing money, jobs were lost, etc. So it was combated by droping the Prime interest rate (the interest rate that banks charge each other for borrowing money) to make up more money, because the money was too scarce.

      In other words, only the Federal Reserve makes up money. All other banks must balance their books between deposits from customers, loans to customers, and loans from other banks.

      • Money is "created" whenever a bank makes a loan... it's all about assets and liabilities. Say Joe deposits $100 in the bank. Now in this fantasy land the reserve requirment is 10%, which means that the bank has to keep $10 of that $100 on hand to cover withdrawals. Ok, now Joe has a reciept that says he has $100 in the bank. The Bank has $10 in reserves, and $90 in cash. Now Bob comes in to get a loan. Bob is a nice guy, so the bank gives him the $90 loan he wants to buy a new pair of pants. Ok, now Joe has a balance in his account of $100, the bank has $10 in reserves, and Bob now has $90 in cash. Do you see how money has been "created" now? Money is created all the time by banks... not just the FRBs.

        In the event that the bank didn't have enough reserves on hand, then they borrow from other banks overnight, and this is where the Fed Funds market and everything comes into play.

        Anyway, the point is, Banks DO create money. When they lend out the $90, the don't have to borrow $90 from another bank to "balance" it. The balance is between assets and liabilities, the bank has a $100 liability with the deposit, but they also have the assets of the $10 in reserve and the $90 loan. So it does balance out, cept there is now $190 in the the money supply when there was only $100 before the deposit was made.
      • by joss ( 1346 )
        Almost right and yet so wrong. Trixillions explanation is excellent, but I guess it might be too complicated for some to grasp.

        The reason the banks books balance is because the loan balances the credit they create. When the bank splits the account into
        Bank a:5000,-5000 b:0 c:5000 d:5000,-5000 bank:0
        in my explanation above - it still balances. But the fact that someone can spend $5000 which they didn't have before increases the money in circulation.

        The banks are supposed to keep a fraction of the money they lend in reserve. In the US the fraction is 8.5% (last I heard).
        This reserve is an additional requirement to the need to "balance their books". Even this requirement gets broken from time to time.

    • Wow. I had many economics classes in college and unless I slept through them all, which I don't believe I did as my grades were fine, I've never heard this concept of inventing money explained quite this way. It certainly does make sense though if you stick with it. But I'm still not sure about the statement that the banks do not borrow any money. What about the Fed? I thought the whole point of Greenspan was to affect the banks and the economy by controlling the interest rate at which the banks borrow funds themselves? If what you're saying is true, and banks basically can make virtual money, what's the point of the Fed, and the lending rate for banks?
      • No, the poster is essentially correct. The banks actually create the money through loans and reserves at the fed. The Fed certainly does enforce a reserve requirement on the banks, and that's one of the tools they have to affect the economy: they can increase reserve requirements on banks and the money supply will contract. But that's rarely used because it's a very drastic measure.

        As for the discount rate, that's used more often, but it's not what really manipulates the money supply. It's treated as an indication of what the Fed intends to do with open market operations, the buying and selling of treasury bonds. This is their main policy tool to contract or expand the money supply.

        You may have taken several econ classes, but I'm not surprised you never ran into this. This is typically covered in intermediate macro and money & banking courses and if you weren't an econ major you probably didn't take those courses.

        • What if A loans a bank $5, giving them $50 to loan. So they loan $50 to B, who pays C, who deposits with the bank. So the bank now has $55, allowing them to loan $550, which they give to D, who pays E, who deposits it, giving the bank the ability to load $6050, etc...

          I use "loans to B, who pays C, who deposits" only because I don't know if this would apply if B simply kept the money in their account...

          It seems that it would let a bank (and perhaps a few helpers) create a nearly infinite supply of money which is legal tender, despite how it came to exist. The person at the end of this chain hops to another country and the bank defaults on all their loans.

          What prevents this from happening?
          • Because they don't have the capacity to loan $550,
            they only have the capacity to loan $50, because
            that's all they have on hand in tangible assets. The $5 that A loaned the bank is a tangible asset, stored as gold or a federally backed piece of paper ("legal tender"). The $50 that C deposits in the bank is a number in the system, but it isn't a tangible asset.

            The bank must have 10% of their total exposure on hand in tangible assets. Futher, the bank's exposure is already the $50 it has loaned to B, so C's deposit of $50 does not mean that the bank may make any new loans until it either collects from B or has futher tangible assets deposited.

            Nice theory though.
            • How does the bank know which money it is allowed to loan based on?

              I mean, if A and C deposit $100 each, the bank has $200 with which to loan $2000...

              So how does the bank distinguish A and C both having money from the following scenario? A deposits $100, B borrows $100, pays C, and C deposits it? Giving the bank $200 in assets, and $100 paid out...

              How do they determine that when A gives them $100 that this is "tangible assets" and when C gives them $100, that this is really their own money, despite being an anonymous $100 bill?
              • Let's just go back to the original situtation,

                * A has deposited $5 in a tangible form (i.e. cash)
                * B has taken out a loan for $50.

                Note that this $50 may NOT be taken out as cash, because the bank doesn't have that cash. If B tries to withdraw $50 cash, then the bank must obtain that full $50 from elsewhere. This only works if the bank has a float of cash sufficient to allow them to give B that $50 and still have 10% of their total exposure as tangible assets. This means they'll have to be slightly above 10% to allow for withdrawls.

                Now, presuming that B has transferred the $50 within the same bank - to C. That means that the bank isn't receiving any more tangible assets.

                On the other hand, if C was to insert another $50 in tangible assets, then the bank would be able to loan an additional $500 - raising their total exposure to $550, for which they have $55 tangible backing.


                I think the problem you've having visualising this may be that we're making up very unrealistic examples. This doesn't work unless these little transactions are backed by a large pool of money, hence allowing that $50 to be withdrawn from this bank without breaking the 10% barrier. The smaller the bank, the larger the percentage of their exposure they need to keep in tangible assets.

                Yes - this does mean that if everyone tried to withdraw their money at once from all the banks in the world, that money wouldn't exist and the system would fail. The statisical probability of this is considered low enought that governments are willing to back these banks against the posibility. Because they are backed by the governments, people trust the banks.

                It does make sense, really. Do what the flock does and you'll be safe.
    • Re:Banks (Score:2, Funny)

      by jsarek ( 514608 )
      Nice post. It takes a smart man to realize this, and a smarter man to realize that it should NEVER BE MENTIONED IN PUBLIC.

      Continue the charade.

      John Sarek
    • Re:Banks (Score:2, Informative)

      This is a good analysis, but you've missed one vitally important point.

      You're 100% right about the money supply growing primary due to bank loans. What you have missed is that, by volume, the great majority of bank loans are secured by real assets.

      Most bank loans (by volume) are in the form of mortages and commercial lending. These loans are secured by claims on the underlying assets. When the bank gives you a mortgage to buy a home, the bank is in effect a partial owner of the home. Only once you pay off the mortgage do you have the title free and clear.

      Let's suppose you build a home and get a bank loan on it in the form of a mortage. You borrow $200,000 and put $20,000 of your own money into it, and in the end you have a home worth $220,000. The money supply has been increased by $200,000, but the bank also gained an asset, the claim on your new home, worth $200,000. And further, society has gained a new asset worth approximately $200,000.

      The point is that to a close approximation, bank loans increase the money supply only when society creates new property to buy and sell with that money. The increase in the money supply is not inflationary, because the total value of all goods increases along with the money.

      This is not just hypothetical; check the Statistical Abstract of the United States and you will see that the total value of mortgages is very close to the total money supply.

      Almost all the money created by bank loans is backed by real assets. These loans are not inflationary and are based on the increased value of the goods created by society.
    • Re:Banks (Score:4, Interesting)

      by Styros ( 144779 ) on Thursday March 14, 2002 @04:50PM (#3164228)
      That is not correct at all. If your example was true, there would be no bad loans at all. Suppose, person A defaulted, so bank A is out $5k. All it needs to do is go through that scheme several times and the invented money covers the bad load. I don't think so.

      The reason why that doesn't work is that the banks have to borrow money to lend person A! Suppose, person C took out his $5k and wrote a check to Home Depot. And, Person A took his $5k loan and wrote a check to Home Depot. When Home Depot comes to collect on those checks, where does bank A get the money to pay the $10k bill? That money has to come from somewhere. Other banks, that's where! Banks borrow money from other banks to cover your loan! In your example, bank A would borrow $5k from bank B @ 5% interest (prime rate). Lend it to person A @ 10% interst. When person A repays the loan, bank A pays back its loan to bank B, and pockets the difference. If person A defaults on that loan, bank A must come up with the money from its own money supply to bank B. If enough people default on bank A, bank A will default. That might cause bank B to be in financial trouble, which might affect bank C, D, etc. This is the exact situation that caused the Asia financial crisis years ago.

  • Hurts paypal (Score:3, Insightful)

    by bluGill ( 862 ) on Thursday March 14, 2002 @02:08PM (#3163339)

    I think this hurts paypal. the Feds basicly said "Paypal is not a bank, because they do not have a bank charter." States can now say to paypal "You are not a bank, quit acting like a bank."

    In other words, they are either a bank or not. If they are a bank, then they can handle money for other people. If they are not a bank, then they cannot.

    Now bank regulations vary from state to state. There are banks in the US that I cannot legally get a loan with, because they are not licensed in my state. (It gets complex in ways I don't know when I want a loan from something that isn't in my state)

  • Wrapper (Score:3, Insightful)

    by sporty ( 27564 ) on Thursday March 14, 2002 @02:11PM (#3163361) Homepage
    So what are they.. a wrapper for a bank? They don't hold any cash per se. But they hold money, sorta.. and allow you to withdraw.. sorta..

    Lord knows.
  • your a statistic waiting to happen.

    suppose you live in a world with out electronics.
    now, you want to buy something thats far away.

    so you go to this guy who says he'll take the money, and give it to the seller, who then uses some other company to send you the goods.

    and most of the time he's true to his word, and most transaction go off with out a hitch.

    then more and more people start using him to carry there money.

    one day the guy has a million dollars he's carring and decides with that much money, I could retire, so he just goes out of businss one day.

    what recourse do you have? none.
    • Didn't they say the same thing about credit cards years ago? Now how many people are using credit cards? In the same analogy, CC company is telling the merchants, I promise to pay you later if you give my client the merchandise now. What recourse do you have that the CC company will pay? In the same way with PayPal, if a company decides to reneg on its promises, it constitutes fraud. A company like paypal or Mastercard or Visa is not going to get up and walk away with your money without some type of legal ramifications chasing after them.
      • credit card companies are regulated, and merchants have recourse if a CC company folded.
        Because of the regulaton, if a CC company said "we quit", they would be investigated, and (in all likely hood)the merchants would get a bail out from the Government.
        What happens if you find a 200 dollar charge you did not make on your CC?
        what happens if Paypal looses you money?

        The CC companies did all sorts of thing when they started to have merchants feal comfortable with the risk.

        • > what happens if Paypal looses you money?

          If PayPal loses your money, they are still held liable. Let's look at it this way, if I give you my wallet to hold while I'm playing basketball and you lose it, you are still responsible for paying me back. Just because you are not a bank and just because there are no regulations on a friend holding a friends wallet, doesn't mean that you can get off with stealing my money. Now in terms of PayPal, if they were to take your money, it constitutes fraud. You can get your money back through court.

          Now, according to what you are saying about the lack of regulations, the thousands of people in the class action lawsuit have no basis to sue because "there are no regulations?" Try telling that to them. A criminal offense is still a criminal offense regardless of whether there is a regulating body over that exact action. Regulations are there to further limit already set regulations regarding an action.

          Secondly, up until a year ago there were no regulations on online banks. But places like Citibank, Charles Schwab, and others have had online presence for many years. Are you saying that since there is no regulations on "online banks" these online banking portals were unsafe and unregulated? No! They are still regulated from the brick and mortar standpoint. Regulations should not change because of the shift to a new platform or technology. A good regulation would be wide enough to cover current and future technologies.

          > The CC companies did all sorts of thing when they started to have merchants feal comfortable with the risk.

          Quite true. But in the beginning, a whole lot of people were hesitant about using Credit Cards, the same way that people have been hestitant about purchasing online. I think places like PayPal has done a good deal to ease people into the PayPal idea. It is just that they are going to lose some public faith in light of the recent incidents. But in the next couple of years, I'm sure you will see more and more people using companies like PayPal
  • From the article : "should help the company stave off attempts by state and federal officials to regulate its business"

    This seems *amazingly* short sighted. Sure there is some regulation and the requisite overhead and hassle. However, if I were in charge of Paypal I'd be screaming for getting legitimized as a real bank. How many people who do not use Paypal already due to security concerns would if it carried the legitimacy of being labeled an official bank. Also, how many current users would use it with more money on deposit? Since Paypal already has an established customer base of people who are accustomed to dealing with online money, why NOT pull out all the stops and offer real banking services? Paypal checking accounts, Paypal brokerage services, Paypal mortgage, Paypal etc, etc, etc. There is serious money to be made in these endeavors!

  • I mean look http://slashdot.org/subscribe.pl Yes yes, I know they state http://slashdot.org/faq/subscriptions.shtml#ss400 _because its easy this way_.

    Is it really that hard to take cc sales over the net? I've never programed a cc transaction, but the rest is rather simple, encrypted page, database, etc. One to two days of work, pluss the time it takes to get the sales use of a credit card.

    Now /. choses to portray paypall as the evil it is. But what I don't get is why they insist on making them money, and to alienate us uses so much?
    • Is it really that hard to take cc sales over the net?

      The programming of the transaction is not difficult. What is difficult is the fact that in order to accept a CC you have to have a Merchant Account. Merchant Accounts are not free, and you still have to use a service for CC validation.

      Granted, for large businesses which take in thousands of transactions per year, this is a cost effective method. However, for the smaller businesses and "Mom and Pop" type things (even in the brick and mortar world), such accounts can be cost prohibitive.

      PayPal allows anyone to be able to take CC payments for pretty much any reason. Yeah, they charge you 3% or 4%, but there's no monthly fee (Merchant Accounts can run $60 a month or more).

      Regardless of the reports of fraud, etc., I still think the PayPal idea, if not the company itself, is a good one. Besides, I've had my brick and mortar bank "accidentally" charge me 6 times for the same transaction (thanks Y2K "upgrade"). Just because there's a "regulatory body" doesn't mean that there won't be any fraud or other bad behavior.

  • by mikosullivan ( 320993 ) <miko.idocs@com> on Thursday March 14, 2002 @03:25PM (#3163771)
    The crematorium in Georgia [cnn.com] that wasn't officially defined as a crematorium, even though it did cremations, so it didn't have to follow cremation regulations.


  • by Rothfuss ( 47480 ) <`moc.liamg' `ta' `ssufhtor.sirhc'> on Thursday March 14, 2002 @03:37PM (#3163821) Homepage
    I have actually been wondering why banks don't adopt a paypal-like service. Pay-pal is a good idea, but I have never been overly enthused about giving them access to my bank account routing numbers because they are really just a company. Maybe a good, nice, well meaning company, but how do I know?

    That is one of the main purposes of the FDIC insurance of banks is to provide legitimacy to the accounts they maintain so that I can trust that if I want my money back, I can get it back. I would really prefer to have my bank acting as PayPal than have PayPal acting as my bank.

    • Citibank does offer some of the services that PayPal does. Particularly, sending money via email. Check out:

      https://www.c2it.com/C2IT/Login [c2it.com]

      Unfortunately (or maybe fortunately), it is not nearly as easy to setup an account. They send you information that you are required to return (with a voided check) to activate the service.

      This is even true if you have a Citibank account and not a third party account.

      I haven't actually returned my paperwork yet, so I don't know how easy or convenient the service is.

    • I've often thought a universal PayPal-like system could be implemented by simply creating bank accounts which can only accept deposits. When the account is set up it is associated with a normal account which can be used for deposits and withdrawals. You would be able to give out your deposit-only account number to anybody and they could simply wire a transfer to that account from their own bank. They wouldn't be able to use the number to get money. When money is deposited into a deposit only account, it is automatically flushed into the associated regular account.

      I don't know a lot about how banks work, however, so I'd be interested to hear the opinions of some bank-smart people.


  • by Animats ( 122034 ) on Thursday March 14, 2002 @06:21PM (#3164939) Homepage
    The Federal Deposit Insurance Corporation may say PayPal is not a bank. But they're not the agency that regulates Federal banks. The Comptroller of the Currency [treas.gov] is. All the FDIC is saying is that PayPal doesn't qualify to become an FDIC member institution. That doesn't mean they're immune from regulation.

    Banks are regulated either by the Comptroller of the Currency (that's what "National Bank" means) or by individual states. Savings and loan institutions are regulated by the Office of Thrift Supervision. [treas.gov] Money transfer firms are regulated by states. Credit card issuers are regulated by Federal law. Broker/dealers are regulated by the Securities and Exchange Commission.

    It's not clear what PayPal is, but because they appear to accept deposits, they're subject to regulation. Even if they store the money somewhere else, that doesn't help; that may make them either a broker or a mutual fund.

    In the early days of money-market funds that offered check-writing privileges, there was a real question how they would be regulated. But that's been worked out. PayPal will end up being regulated as some kind of financial institution, even though it's not yet clear which kind.

God helps them that themselves. -- Benjamin Franklin, "Poor Richard's Almanac"