9 ms·

'Rather than steal money from depositors' accounts, Bhalla just invented a new account for himself. "We went into the database where the accounts are and set up

by adastra 13y ago

'Rather than steal money from depositors' accounts, Bhalla just invented a new account for himself. "We went into the database where the accounts are and set up an account with $14 million," Bhalla explained. "We just created $14 million out of thin air." I remember the first time I discovered this is how banks operate when I was a kid. It's really pretty mind-blowing when you think about it. And knowing how full of bugs most software is it really made me question the entire banking system. (My mind has still yet to be put at ease on that...)

maratd 13y ago
Oh, absolutely. People think of money in very concrete terms. Like physical currency. But that hasn't been the case for a long time. Today, money is just a few bits in a database here and there. And of course, making yourself a millionare (or billionare) is as easy as inserting a row into a database. Here is the important part: While the article insinuates this creation of money out of thin air as a victim-less crime, it is not! Even worse, the bank does not lose a penny from this type of criminal activity. The ones who pay for it? We all do. By creating money out of thin air, you are increasing the money supply, which pushes up inflation due to higher demand for goods, which in turns reduces the value of the currency. In other words, when you create money out of thin air like this, you are taking a tiny bit from everybody who uses the currency! Theft on an absolutely universal and massive scale!
- joosters 13y ago
  That's not true. The bank does lose out from this. Individual banks can't simply add millions of dollars to all accounts on a whim, as they won't be able to pay out when customers withdraw / transfer out the cash. It's just that, to a huge organisation, a $14 million accountancy error could go unnoticed for a long time. Likewise, a dollar or two missing from my piggy bank will probably not be noticed. Merely a question of scale, but the loss is still there.
  - sageikosa 13y ago
    > as they won't be able to pay out when customers withdraw / transfer out the cash Banks can't do that right now anyway. Banks only hold onto cash to meet reserve requirements, which is a fraction of the deposits held for depositors. If everyone tried in a bank to withdraw cash, you'd have a run.
    - joosters 13y ago
      Yes, and the more money you 'create' by altering the database, the more likely they'd be unable to pay out.
  - maratd 13y ago
    > The bank does lose out from this. Individual banks can't simply add millions of dollars to all accounts on a whim, as they won't be able to pay out when customers withdraw / transfer out the cash. Please explain this. Almost all significant transactions are electronic now. Nobody withdraws millions of dollars in physical currency. You're just modifying rows in a database. All the bank would do is tell the other bank that they have the money now and debit a database row which was fake to begin with?
    - jckt 13y ago
      As you said, inflation occurs when the money supply goes up, and dangerously so if it happens for no good reason (in your example). I suppose it is not in the interest of banks to have hyperinflation either?
    - joosters 13y ago
      > Nobody withdraws millions of dollars in physical currency I'd suggest that the hackers who manage to alter their balance are exceedingly likely to be the kind of people to try and obtain a physical withdrawal of their wealth! But even in electronic form, there is some settlement going on behind the scenes. Let's say I hack my bank and give myself $100 billion dollars, then try and transfer this to another bank in a country with a suitable lack of extradition treaties. No receiving bank is going to blindly accept a transfer in of $100 billion. Do you think they just take the other bank's word for it, that they are good for the money?
- DanHulton 13y ago
  To kind of play devil's advocate here, then does this mean that every time the government prints money, they're stealing on "an absolutely universal and massive scale"? I'm not trying to discredit you, it's just kind of an interesting thought.
  - Retric 13y ago
    Another way of looking at it when governments create money there taxing everyone for using there currency. If you have 1kg of gold there it's no cost to you it's only when you have cash or are owed cash that it's a problem.
    - deleted 13y ago
      [deleted]
  - lmkg 13y ago
    Essentially, yes. The government printing more currency is roughly equivalent to levying a tax on all holders of that currency, in proportion to the amount held.
    - tomsaffell 13y ago
      ..which is interesting when you consider the uproar in Cyprus over the taxing of savings accounts. "Taxing savings" sounds so much worse than "printing money", but in fact it was better in some ways, because the tax could be applied progressively[1], so that wealthier individuals were taxed proportionately higher. It's probably worse in other ways, for example it probably does more to erode confidence in the banking system overall, which is perilous. * - I realize this wont seem 'better' to everyone, but at-least taxing savings has the option of selective application. Printing money hits everyone the same.
    - wolfpackk 13y ago
      No, it is not equivalent, as without a constant, steady inflation rate, actors in an economy have a propensity to hoard savings, which can in turn create a viscous deflationary cycle. Economics can not, at least not any time soon, be an exact science as there are infinitely many factors at work, however, a steady, relatively predictable amount of inflation coupled with understanding the time value of money is the best approach for the foreseeable future.
- Retric 13y ago
  There is a 3rd party that keeps track of how much money banks have. Editing that third party let's you steal from everyone until that point your just stealing from a specific bank. http://en.wikipedia.org/wiki/Federal_Reserve_System http://en.wikipedia.org/wiki/Federal_Reserve_System
  - maratd 13y ago
    > There is a 3rd party that keeps track of how much money banks have. My understanding of the reserve system, which is entirely limited, is that the Federal Reserve relies on what the bank reports? If the bank doesn't know it's been hacked, it'll simply report the wrong figures and that will be that?
    - Retric 13y ago
      Banks report net transactions aka BoA and United have customers writhing checks back and forth all the time, but on a given day the net transaction is the sum of all those little transactions. Thus BoA would say the revived 1 million dollars net from United and united would say the lost 1 million to BoA. As long as those numbers match there is no reason not to trust them. Cash is is handled separately and banks can slightly fudge those numbers. But, there digital cash on hand better match yesterday's balance plus today's net transactions. PS: Banks can convert cash back and fort from digital to hard currency, but that's handeled by a third party which also reports those transactions.
Zenst 13y ago
Your mind should never be totaly at ease and offset by the banks that have govermental or seperate assurances/protection for worst case sitiuations. So if bank goes compeletely bust then upto a amount is covered by a goverment or seperate entity. Then you don't have to worry as much, then you avoid onine banking and have that sidabled for your account and have to worry even less, get to know your local branch staff and then have even less to worry about. But never be completely at ease, even if you own the bank.
LowKarmaAccount 13y ago
Here's a basic explanation of the fractional reserve system prepared by the Federal Reserve http://archive.org/details/ModernMoneyMechanics http://archive.org/details/ModernMoneyMechanics
bubbleRefuge 13y ago
A few myths are circulating here. Let me declare 1)Printing money does not cause inflation. 2)We do not have a fractional reserve banking system, banks can and do create money out of thin air as suggested(aka loans). 3) Bank Runs are not a problem. The price level/inflation level in macro econ is the intersection of supply and demand. So called demand-pull/cost-push inflation. Sure, you can say that printing money causes inflation ceteris paribus. But in the real world things are not ceteris peribus. You can create money and have deflation if supply/production increases at a greater rate that money creation causes increases in demand. If money creation results in balances held in deposit but not spent, then there is no inflation as a result of the money creation itself. This probably explains why the US economy has been teetering on deflation: most of the money created ends up hoarded in the accounts or rich people who do not spend it. There are two kinds of money: bank deposits and reserves. Reserves( aka hi powered money/vertical money) are physical currency in circulation or in bank vaults and special deposit accounts at the Fed held by banks that are members of the federal reserve system. Bank deposits ("private money" or vertical money) are created by banks when they create loans. The lending process is regulated by the Fed and government agencies( ex. office of the comptroller of the currency). Yes, the Fed imposes reserve requirements on member banks. But these requirements do not constrain their ability to lend. The reason is b/c banks can make loans and borrow reserves from the federal funds market or the Fed directly in the following accounting period. Reserves are used for interbank deposit settlement. So when a check is written from account holder A in bank A to AH B in bank B, the transaction is settled at the reserve level using reserve accounts at the Fed. It is complex and I could go into capital requirements, which are a true constraint on money creation by banks. Because of FDIC insurance, bank runs are not a problem in our system. Ultimately the Fed can back stop the FDIC as it kind of did during the crisis of 08.
marvin 13y ago
Yeah, I've been thinking about exactly this kind of attack for years. Didn't think it would be as easy as adding a row to a database table.

by adastra 13y ago

maratd 13y ago

Oh, absolutely. People think of money in very concrete terms. Like physical currency. But that hasn't been the case for a long time. Today, money is just a few bits in a database here and there. And of course, making yourself a millionare (or billionare) is as easy as inserting a row into a database. Here is the important part: While the article insinuates this creation of money out of thin air as a victim-less crime, it is not! Even worse, the bank does not lose a penny from this type of criminal activity. The ones who pay for it? We all do. By creating money out of thin air, you are increasing the money supply, which pushes up inflation due to higher demand for goods, which in turns reduces the value of the currency. In other words, when you create money out of thin air like this, you are taking a tiny bit from everybody who uses the currency! Theft on an absolutely universal and massive scale!

joosters 13y ago
That's not true. The bank does lose out from this. Individual banks can't simply add millions of dollars to all accounts on a whim, as they won't be able to pay out when customers withdraw / transfer out the cash. It's just that, to a huge organisation, a $14 million accountancy error could go unnoticed for a long time. Likewise, a dollar or two missing from my piggy bank will probably not be noticed. Merely a question of scale, but the loss is still there.
- sageikosa 13y ago
  > as they won't be able to pay out when customers withdraw / transfer out the cash Banks can't do that right now anyway. Banks only hold onto cash to meet reserve requirements, which is a fraction of the deposits held for depositors. If everyone tried in a bank to withdraw cash, you'd have a run.
  - joosters 13y ago
    Yes, and the more money you 'create' by altering the database, the more likely they'd be unable to pay out.
- maratd 13y ago
  > The bank does lose out from this. Individual banks can't simply add millions of dollars to all accounts on a whim, as they won't be able to pay out when customers withdraw / transfer out the cash. Please explain this. Almost all significant transactions are electronic now. Nobody withdraws millions of dollars in physical currency. You're just modifying rows in a database. All the bank would do is tell the other bank that they have the money now and debit a database row which was fake to begin with?
  - jckt 13y ago
    As you said, inflation occurs when the money supply goes up, and dangerously so if it happens for no good reason (in your example). I suppose it is not in the interest of banks to have hyperinflation either?
  - joosters 13y ago
    > Nobody withdraws millions of dollars in physical currency I'd suggest that the hackers who manage to alter their balance are exceedingly likely to be the kind of people to try and obtain a physical withdrawal of their wealth! But even in electronic form, there is some settlement going on behind the scenes. Let's say I hack my bank and give myself $100 billion dollars, then try and transfer this to another bank in a country with a suitable lack of extradition treaties. No receiving bank is going to blindly accept a transfer in of $100 billion. Do you think they just take the other bank's word for it, that they are good for the money?
DanHulton 13y ago
To kind of play devil's advocate here, then does this mean that every time the government prints money, they're stealing on "an absolutely universal and massive scale"? I'm not trying to discredit you, it's just kind of an interesting thought.
- Retric 13y ago
  Another way of looking at it when governments create money there taxing everyone for using there currency. If you have 1kg of gold there it's no cost to you it's only when you have cash or are owed cash that it's a problem.
  - deleted 13y ago
    [deleted]
- lmkg 13y ago
  Essentially, yes. The government printing more currency is roughly equivalent to levying a tax on all holders of that currency, in proportion to the amount held.
  - tomsaffell 13y ago
    ..which is interesting when you consider the uproar in Cyprus over the taxing of savings accounts. "Taxing savings" sounds so much worse than "printing money", but in fact it was better in some ways, because the tax could be applied progressively[1], so that wealthier individuals were taxed proportionately higher. It's probably worse in other ways, for example it probably does more to erode confidence in the banking system overall, which is perilous. * - I realize this wont seem 'better' to everyone, but at-least taxing savings has the option of selective application. Printing money hits everyone the same.
  - wolfpackk 13y ago
    No, it is not equivalent, as without a constant, steady inflation rate, actors in an economy have a propensity to hoard savings, which can in turn create a viscous deflationary cycle. Economics can not, at least not any time soon, be an exact science as there are infinitely many factors at work, however, a steady, relatively predictable amount of inflation coupled with understanding the time value of money is the best approach for the foreseeable future.
Retric 13y ago
There is a 3rd party that keeps track of how much money banks have. Editing that third party let's you steal from everyone until that point your just stealing from a specific bank. http://en.wikipedia.org/wiki/Federal_Reserve_System http://en.wikipedia.org/wiki/Federal_Reserve_System
- maratd 13y ago
  > There is a 3rd party that keeps track of how much money banks have. My understanding of the reserve system, which is entirely limited, is that the Federal Reserve relies on what the bank reports? If the bank doesn't know it's been hacked, it'll simply report the wrong figures and that will be that?
  - Retric 13y ago
    Banks report net transactions aka BoA and United have customers writhing checks back and forth all the time, but on a given day the net transaction is the sum of all those little transactions. Thus BoA would say the revived 1 million dollars net from United and united would say the lost 1 million to BoA. As long as those numbers match there is no reason not to trust them. Cash is is handled separately and banks can slightly fudge those numbers. But, there digital cash on hand better match yesterday's balance plus today's net transactions. PS: Banks can convert cash back and fort from digital to hard currency, but that's handeled by a third party which also reports those transactions.

Zenst 13y ago

Your mind should never be totaly at ease and offset by the banks that have govermental or seperate assurances/protection for worst case sitiuations. So if bank goes compeletely bust then upto a amount is covered by a goverment or seperate entity. Then you don't have to worry as much, then you avoid onine banking and have that sidabled for your account and have to worry even less, get to know your local branch staff and then have even less to worry about. But never be completely at ease, even if you own the bank.

LowKarmaAccount 13y ago

Here's a basic explanation of the fractional reserve system prepared by the Federal Reserve http://archive.org/details/ModernMoneyMechanics http://archive.org/details/ModernMoneyMechanics

bubbleRefuge 13y ago

A few myths are circulating here. Let me declare 1)Printing money does not cause inflation. 2)We do not have a fractional reserve banking system, banks can and do create money out of thin air as suggested(aka loans). 3) Bank Runs are not a problem. The price level/inflation level in macro econ is the intersection of supply and demand. So called demand-pull/cost-push inflation. Sure, you can say that printing money causes inflation ceteris paribus. But in the real world things are not ceteris peribus. You can create money and have deflation if supply/production increases at a greater rate that money creation causes increases in demand. If money creation results in balances held in deposit but not spent, then there is no inflation as a result of the money creation itself. This probably explains why the US economy has been teetering on deflation: most of the money created ends up hoarded in the accounts or rich people who do not spend it. There are two kinds of money: bank deposits and reserves. Reserves( aka hi powered money/vertical money) are physical currency in circulation or in bank vaults and special deposit accounts at the Fed held by banks that are members of the federal reserve system. Bank deposits ("private money" or vertical money) are created by banks when they create loans. The lending process is regulated by the Fed and government agencies( ex. office of the comptroller of the currency). Yes, the Fed imposes reserve requirements on member banks. But these requirements do not constrain their ability to lend. The reason is b/c banks can make loans and borrow reserves from the federal funds market or the Fed directly in the following accounting period. Reserves are used for interbank deposit settlement. So when a check is written from account holder A in bank A to AH B in bank B, the transaction is settled at the reserve level using reserve accounts at the Fed. It is complex and I could go into capital requirements, which are a true constraint on money creation by banks. Because of FDIC insurance, bank runs are not a problem in our system. Ultimately the Fed can back stop the FDIC as it kind of did during the crisis of 08.

marvin 13y ago

Yeah, I've been thinking about exactly this kind of attack for years. Didn't think it would be as easy as adding a row to a database table.