Here is another good quote from the Manchin letter:

Several other countries, including the European Union, have issued warnings...

It's like they didn't even proofread it. I'm not a Europe expert but I'm pretty sure the European Union isn't a country.

The lack of regulation is worrying. That exchange that just flamed out is an example of what the entire financial system would be with no oversight.

Yes exactly. The exchange that just flamed out was incredibly poorly run, and deserved to go out of business. Now there is space in the market for more competent companies to take over the market share. I'd love to see the entire financial system operate under a meritocracy such as this.

Banks used to fail all of the time with depositors losing assets. This caused a lot of problems, so we enacted some regulation.

Now banks still fail (several weekly, without much notice), but depositors have mandated insurance.

Are you against that?

If depositors didn't have mandated insurance, they would pay more attention to the credit-worthiness of the bank they work with, and we might have avoided the 2008 debacle.

It seems that the health of the bank is something which is actively obfuscated. Saying "buyer beware" is like telling people that they should be responsible to make sure that the cars they buy are safe enough, or to make sure that the restaurants they eat at have clean enough standards in the kitchens. That's the entire point of regulatory inspections: No one can afford to be attentive to that level of detail or be an expert in everything.

I agree people cannot be attentive to everything.

HOWEVER, people can be a lot more attentive now then they could ten years ago (for example, online reviews of cars/restaurants/etc) and in ten years they will be able to be even more attentive.

If we do things that foster attentiveness, everyone will be better off.

> HOWEVER, people can be a lot more attentive now then they could ten years ago (for example, online reviews of cars/restaurants/etc)

Its a good thing online reviews are reliable sources of information with transparent provenance that neither the company itself nor its competitors spend substantial efforts loading with false-flag propaganda.

Or, at least, that's a good thing in whatever alternate universe it is true in.

The average consumer doesn't understand banking well enough to realise they'd receive a better interest/fee/overdraft/etc structure at half a dozen other banks that actively market their more favourable interest/fee/overdraft structure, never mind well enough to understand the bank's exposure to complex toxic assets that couldn't be grasped by professionals paid orders of magnitude more than them specifically to quantify that risk.

Why not just use a bank that doesn't do any outside investing and keeps all the money inside the bank?

Then you don't need any "experts".

(To answer my own question: These types of banks don't exist because FDIC insurance makes them unprofitable)

If depositors didn't have mandated insurance, they would have magically had the time and inclination to learn about credit default swaps and see the dangers in the system that many people who do that for a living were unaware of?

Sure: If I didn't have mandated insurance, I would bank with the bank that maintained a high fractional reserve- It's obvious to anyone that you'd want to do this.

Banks that handled credit default swaps surprise had the lowest fractional reserves.

Of course. Next time I'm choosing a bank I'll be sure to pay close attention to the part of their brochure where they say what their fractional reserve is.

You don't have to, because of FDIC insurance...

...and now you know why things went to hell in 2008.

That's a completely different take on the financial crisis than anything else I've read. The history of the financial industry is one of the industry finding ways around existing regulation, over-leveraging itself, and then crashing.

Financial panics were a common occurrence before there were regulations. You're saying that less regulation would create a more stable system, but that historically has not been the case.

In other words, for what you're proposing, we tried it and it didn't work.

Actually, we sorta tried this between 1850 and 1920, which is pretty much the highest GDP growth time period in the history of the US.

Which also included a financial crisis and recession roughly every 10 years and ended with the Great Depression. How much faster would the economy have grown if it hadn't been plunged into recession once a decade?

http://en.wikipedia.org/wiki/Financial_crisis#History

Growth might have been faster or slower, who can say.

Its pretty clear that whatever not having mandatory insurance does, it doesn't suddenly imbue consumers with the insight and skill to manage their deposits in a way that avoids widespread catastrophic bank failures and attendant losses. This has been tested in the real world.

> If depositors didn't have mandated insurance, they would pay more attention to the credit-worthiness of the bank they work with, and we might have avoided the 2008 debacle.

Or, more likely, the 2008 debacle (a consequence, in large parts, of removing regulations that addressed contributing causes of the 1929 debacle) would have looked more like the 1929 debacle (since you then would have also removed a regulation designed to mitigate the effect of events like the 1929 debacle).

The absence of regulation of credit-worthiness of banks doesn't give the average depositor either the time, inclination, or skill to evaluate the credit-worthiness of banks, especially when, as was actually the case in the 2008 debacle, information relevant to that is actively being concealed under many layers of obfuscation.

The fact that people still kept funds in Mt. Gox is proof enough of the absurdity of this position.

I didn't keep my funds in Mt. Gox, due to the risks involved.

It's hard for me to judge from my position whether others who did used bad judgement or simply were unlucky while taking a calculated risk.

The bond holders and shareholders didn't have insurance nor did the counter parties (mostly other banks)[0] but didn't effectively assess the risks despite thousands of analysts between them. How could/should a retail investor with a few hundred or thousand dollars assessed the bank's creditworthiness? A few analysts, economists and traders saw it coming but most did not.

[0] I know they were largely bailed out but there was no promise in advance (and we probably agree that they shouldn't have been bailed out to the extent that they were.

Simple: You go to a bank that isn't taking these risks to begin with. (Such banks don't exist now because FDIC insurance means there's no money in creating such a bank.)

Even in such a case how do you evaluate the quality of the loans leant?

There is no way I have enough time in my life to fully understand how the banking system works to judge their worth. And I suspect those in power prefer that the masses don't have that understanding either.

I barely understand how my Honda Civic works.

You can't look online and find info from more knowledgeable people on whether the Honda Civic is a good car?

Sure I could do that. That's how I ended up with a Honda Civic. I can also ask my friends if they like Bank Of America or CitiBank or whatever; but to truly understand the health of a bank... I'd need a degree or something.

No, you just go to a bank that maintains 100% fractional reserves (if you don't wan't to take on additional risk)

No degree required.

Easier said that done apparently... http://www.ronpaulforums.com/showthread.php?148961-Any-Full-...

I'm having trouble understanding how such a bank would be profitable; assuming banks need to be profitable to justify their existence.

They're not profitable because of the existence of fdic insurance.

> They're not profitable because of the existence of fdic insurance.

Even without FDIC insurance a bank with 100% fractional reserve couldn't be profitable (or even operate), unless accounts had negative interest rates, as it couldn't loan money out from deposits to earn revenue.

Yes I'm against mandated insurance. Some enterprising group of young people will be able to make a decent living evaluating the viability of bitcoin (and dogecoin, etc) exchanges and selling the information in a monthly email. So much win. So little compulsion.

The implicit corollaries to this are a) that anyone who wasn't capable of recognizing the exchange as poorly run (eg anyone who isn't a programmer and can't see past the friendly corporate graphics on the landing page) deserves to lose whatever funds they were stupid enough to trust to that institution, and b) if the (alleged) 6% of all extant BTC that went missing turns up in hands of some unknown actor later, well that's nobody's business.

> "anyone who wasn't capable of recognizing the exchange as poorly run (eg anyone who isn't a programmer and can't see past the friendly corporate graphics on the landing page)"

I don't think that being a programmer was necessary to be wary of MtGox.

MtGox was being called out in strong terms as long as 3 years ago on HN and bitcoin forums (https://news.ycombinator.com/item?id=2676263). This sort of knowledge certainly should have found it's way to "non-programmers" at least in the past year.

Trusting MtGox during the past year wasn't a matter of not being a programmer. It was a matter of being an idiot.

Do idiots deserve to lose their money? No. I agree with the rest of your comment.

>I'd love to see the entire financial system operate under a meritocracy such as this.

It does. Banks fail every day. Hundreds of banks since 2008.

Oh, I'll bet you're talking about the TBTF banks, that were kept afloat with some interesting finance to prevent the global system from collapsing.

I laugh every time someone says they should have all failed. I don't think people realize who, exactly, loses when banks go out of business. Hint: It isn't Jamie Dimon or Lloyd Blankfein (though they would temporarily lose their jobs). It's everyone who owns shares in the bank, everyone who owns bonds of the bank, everyone who works at the bank, everyone who banks at the bank (yes, FDIC covers some, but that itself is a bailout), pension funds, pensioners, insurance users, and on and on. These aren't some rich "banksters", they're your friends and neighbors.

> I'd love to see the entire financial system operate under a meritocracy such as this.

You might think you would, but I suspect you would not.

In other words, "I disagree with you."

Could you add something to the discussion? A real argument, perhaps? Nobody called for a hand-raising of who was for or against economic regulation.

Actually, I'd say it's more snarky than "I disagree with you", it's "you haven't thought this through or you would disagree with you".

If you like analogies, consider the difference between using an old, creaky, but battle-tested codebase that handles mission-critical tasks, and saying "we should just throw it all away, build a quick and dirty open source replacement, and let people fork the heck out of it". Old crufty code contains lots of horrible crap, but a lot of it is there because it's necessary. Replacing the financial system with some kind of anarchy -- meritocratic or not -- is going to have the same effect, and we can't afford for something as critical to everyone's wellbeing as the financial system turn into an unstable Darwinian mess.

In any event, I was going to write an essay, but a one-liner was funnier.

So you're saying that Bitcoin is so volatile and risky that only a fool use it?

Noted, thanks for the warning.

> That exchange that just flamed out is an example of what the entire financial system would be with no oversight.

The market is actually recovering quite well from that incident, so what exactly is so worrying? A bad business failed; that's what's supposed to happen.

Hmm. If I were a customer of Mt Gox and lost money, I don't think I would agree that it's an example of a market working as intended.

Well, what if you were the investor in a start-up, which failed, and you lost your invested money? Would you consider that the market working as intended? What if you loaned someone some money, and they failed and got bankruptcy, meaning you lost your loan. Is that the market working as intended?

We've created this kind of weird deal with banks, where you loan people money at super-low rates, but in return you're insulated from the normal consequences of failure, and have a ton of flexibility in terms of when you can demand repayment of your loan -- to the point where most people don't probably consider their bank balances a loan.

I'm not here to say that this is a good or a bad thing. Mt. Gox was more like a normal loan or almost every other financial instrument in the world, and less like a bank. It seems hard to suggest that it's uniquely bad for Mt. Gox to act like almost every other financial instrument in the world -- as long as expectations are aligned that it's not the curious anomaly known as a "bank."

I don't have a dog in this fight and I'm not interested in an extended debate... but I don't think most of Mt Gox's customers realized that by letting Mt Gox hold their money they were effectively investing in a high-risk venture under extremely unfavorable terms.

There were plenty of warning signs that Gox had serious issues, and they had existed for months.

The real situation turns out to be far worse than I expected, but what I expected had me off Gox months ago.

That's their problem, it's a currency exchange, trading is a risky business, giving your money to strangers shouldn't be taken lightly and you shouldn't just presume it's safe. The Gox problems were not a secret, 10 seconds of research would have informed anyone of them.

Trading is a risky business, but "the exchange loses my money" is not supposed to be a substantial portion of that risk...

Or to put it another way, if people properly understood (i) the nature of counterparty risk, and (ii)how the average Bitcoin exchange handled transactions, suddenly those banking fees would seem like an absolute bargain.

Comity! I don't have a dog in the fight either, and I agree that expectations alignment and transparency are key, and that it is likely that neither were present here.

And if I were a career criminal, I'd probably have a pretty low opinion of the justice system (actual problems with said justice system aside).

My point? It's hard to be reasonable about things when you're coming at them from a certain perspective. Just as a criminal sentenced to life without parole probably thinks that the courts trying him are corrupt, people who lost a lot of money on MtGox probably think that the entire economic system and Bitcoin market is broken. Are they correct? It's possible, but they're not in the most rational frame-of-mind right now, are they?

So? Businesses fail, whether you like it or not, that is how markets are supposed to function. It is clearly an example of a functional market. That doesn't mean people aren't defrauded, there's no such thing as a market without crime.

A bad business took millions of people's dollars and disappeared them — that's not what is supposed to happen.

Yes it is, that's what a failure is. A business can't fail and not lose money, it fails because it loses money.

There's an enormous difference between a business taking a loss and making other people's money disappear. If the corner grocer up and decides to close the place, they don't take my property with them. If my dry cleaner had to close up shop, I would not expect them to sell my suit off. Destroying other people's property upon closure is not a normal characteristic of a business failing. That's more than just a business failure.

You're making huge presumptions about a failure that is still in progress. You have no idea if that money actually disappeared or not or whether fraud was involved or not. You're claiming the unknown isn't normal, but you can't know that because you don't know what happened yet, no one does.

If fraud is involved, someone will go to jail and authorities will attempt to recover assets. This is perfectly normal in a functioning market.

You cannot claim that because crime occurs the market isn't functioning.

This is what I was addressing:

"what exactly is so worrying? A bad business failed; that's what's supposed to happen."

If all that had happened was a bad business failed, that would not be very worrying. I don't think anybody would be upset if MtGox had simply closed their doors and returned all their customers' funds. What is worrying is how many people outside of the business appear to have lost their property in the incident.

You can judge for yourself whether you feel the market is "functioning" — but if that many people lost that much money, it is absolutely not what is supposed to happen when a business fails.

You seem to be of the opinion that whether a market is riskier than most participants realize (and would be willing to tolerate if they did know) is tangential to how well it is functioning. That's a valid viewpoint. But it still makes sense for participants to worry when they realize how little safety they have in the market.

I didn't say it's what's supposed to happen when a business fails, I said bad businesses are supposed to fail. We can't talk about what happened yet, the incident is still in progress. For all we know the acquisition rumours are true, Gox will reappear under new management and investors will be compensated.

'The money' was mostly imaginary, even beyond the imaginariness of bitcoins. Lots of the coins were bought at a much lower rate; they were ALL valued at the value of the last coin traded. Makes for a big, inflated, imaginary 'loss'.

But in fact only the money invested was lost, which I imagine was an order of magnitude smaller than what was reported.

All money is imaginary.

It is in its infancy; if bitcoins are viable, something will have to be done.

It's not an if; they're already viable and already used enough to matter.

That's funny...

When Lehman Bros went down, the US economy went to hell.

When MtGox went down, the bitcoin price returned to its previous level within a couple days.

Clearly we need more oversight of bitcoin.

The assets lost in MtGox were a rounding error for Lehman.

Yes, but as a proportion of the relevant market, they were far greater, which actually strengthens the point.

No it doesn't. The relevant market is trivial compared to the size of the global financial system. The entire Bitcoin market could evaporate today and cause barely a ripple.

Lehman had significant assets in the fiat currency of the largest economy in the world, a fiat currency that also forms significant portions of the cash reserves of other major economies. This is to say nothing of the interconnected investments and chain reactions this caused, since it wasn't just about the amount of money lost but whose money.

Yes, everything you say is correct (AFAIK), but it's not what I was talking about.

The thesis of my comment was this: the collapse of MtGox involved a larger proportion of the bitcoin market than the proportion of the dollar market involved in the collapse of Lehman. Ergo, the collapse of MtGox is more significant to Bitcoin than the collapse of Lehman was to the dollar.

In terms of USD, or in terms of market cap?

> The lack of regulation is worrying.

What lack of regulation?

MtGox existed because it is nearly impossible to open an exchange in the US. Almost every other country is more Bitcoin-friendly in terms of regulation than the US.

Or are you talking about regulating the source code and running instances of the Bitcoin client?

> MtGox existed because it is nearly impossible to open an exchange in the US.

That's kind of orthogonal to the issue of whether bitcoin can be regulated (it can, but that has little do with why exchanges in the US are legally difficult.) An exchange that trades bitcoin for boring fiat currency has to manage and distribute funds from fiat currency accounts, and its US regulation of that activity that produces a significant compliance cost to running an exchange in the US.

Perhaps the very existence of a currency that cannot be regulated is worrying?

In what sense do you consider bitcoin to be a currency that "cannot be" regulated?

Do you mean that it cannot be regulated because there isn't an effective way for governments to exert control over how much of it is produced? I don't see that as being particularly worrying. No more so than foreign currencies are worrying... does Iceland worry that they cannot control the production of Argentine pesos?

Do you mean in the sense that businesses that use it cannot be regulated? Because that is obviously false. Of course businesses which use bitcoin can be regulated. Why couldn't they be? As VMG points out, the regulation of bitcoin businesses is not hypothetical; they are regulated.

Do you mean in the sense that bitcoins cannot be taxed? Because that is also obviously false. Here is how the IRS could tax bitcoin: "Attention American taxpayers: report your bitcoin shit, or we will nail you for tax evasion and send your ass to jail." How the hell do you think they tax all-cash businesses?

Bitcoin does not fundamentally change the game like many people seem to think it does.

In the first sense. Does the US worry that it can't directly control the production of renminbi? Absolutely.

Maybe they should not. I see absolutely no reason why you would find it worrying that they cannot. That's basically just being worried by the sovereignty of other nations; worried that you can't boss other people around... what a perverted concern.

If bitcoin is only worrying to the extent that foreign currencies are worrying, then I don't see what the big deal is. They cope with the existence of what, 179 foreign currencies right now (minus a few pegged to the dollar, but whatever)? They can learn to cope with 180.

Worrying to the OP - I find it enormously interesting.

And at least in the case of the US they can (and do) lean pretty hard on any of the other 179 governments when they really want to. There is no central Bitcoin bank to lean on. That's all I'm saying.