Category Archives: Econ & Money

Peter Shane Explains What Happens If the Money Runs Out

Posted on July 20, 2011 by Michael Froomkin

An obvious question, should Congress not manage to fend off default within the next two weeks, is: What does the President do then? If the President cannot pay off America’s creditors and keep all government programs running, what legal authority does he have to deal with the crisis?

Answers at What May a President Do if He Cannot Pay Our Bills Without Borrowing and Borrowing More Money is Unlawful?.

The bottom line is that the President has a pretty free hand to “defer” any spending he wants — an ironic given decades of Congressional attempts to stamp out claimed executive “impoundment” authority and force Presidents to spend as directed by Congress.

The only thing I’d add to Peter’s story, which is worth a look, is an historical note: the 19th Century budget process also relied on something called the Anti-Deficiency Act (which still exists in somewhat amended form. The basic idea behind the early versions, was that if anyone in Treasury paid any expenditure not authorized by law (which then meant an appropriation), the official risked being personally liable for any overpayment.

Posted in Econ & Money, Law: Constitutional Law | Comments Off on Peter Shane Explains What Happens If the Money Runs Out

Stanley Langbein Explains the Why the FDIC is Not a Major Post-Debt Ceiling Worry

Posted on July 17, 2011 by Michael Froomkin

In an email he has kindly allowed me to quote, my banking expert colleague the FDIC issue as follows:

The FDIC is largely funded through premiums charged to the banks, and has backup authority to reach, essentially, the entire capital base of the depository institution industry. It also has authority to borrow from the Treasury, which it did in late 2008 (after TARP was past), and indeed it was an FDIC guarantee program, NOT the TARP, which mostly stabilized the industry — Goldman Sachs and Morgan Stanley, for instance, became and remained bank holding companies, not to access the TARP (which they were allowed to do without becoming BHCs), but to access the FDIC guarantee program. The FDIC still has outstanding debt to the Treasury from this episode.

For this reason, a failure to raise the debt ceiling is not likely to have any immediate effect on the FDIC’s funding sources. Presumably the matter would be resolved before the lack of Treasury funds would affect the FDIC’s insurance funds.

That being said, bank runs are caused by perceptions, not objective facts. If you can worry about this, I suppose there are at least 250,000 individuals who are less sophisticated, most of them far less so, who can worry too. I don’t know if this could cause a “run” on the banks, because in the envisioned circumstances I don’t think there would be any place to run.

But I don’t think Congress will refuse to raise the debt ceiling. The primary effect of this episode, however, will be to put a question in the back of everybody’s mind about government credit and government guarantees generally. That will affect confidence in FDIC insurance, I think, in the long if not the short run. So on some level I think you are right to worry about it.

Actually, I find that mostly reassuring….

Posted in Econ & Money | Comments Off on Stanley Langbein Explains the Why the FDIC is Not a Major Post-Debt Ceiling Worry

What Happens to the FDIC if the Debt Ceiling Is Not Raised?

Posted on July 14, 2011 by Michael Froomkin

If the US hits the debt ceiling, will there be a run on the banks?

And if there is, would the dept ceiling impose any limits on the FDIC’s ability to raise funds in the event of a bank failure?

The two questions seem the same to me: if there is confidence that the FDIC will have all the funds it needs, there will not be a run on the banks. But if there is any doubt, there will be, creating the very problem…

So, does anyone know if the FDIC would be limited or not?

Posted in Econ & Money | 11 Comments

Bitcoin Compared Unfavorably to Game Currency

Posted on July 6, 2011 by Michael Froomkin

Edward Castronova, the leading economist of online gaming, writes that “Experience with game currencies makes me skeptical about Bitcoin“.

Game currencies are good currencies. What are the features of those currencies?

  • You get money only by doing things that can be interpreted as “productive work.” No freebies or handouts, and nothing abstract. You don’t solve puzzles to get coin, you run FedEx quests. 
  • Mild inflation. As in the real world, mild inflation makes people happiest. Small enough to be unnoticeable in the short run, yet gives people a sense over time that their wealth and power is rising (even if it isn’t). 
  • It assumed that the currency will be hacked and exploited. A strong central authority is in place to seize illicit funds and roll back damage.

Bitcoins don’t have these features.

One thing, though: the last point is probably not consistent with strong anonymity. If you think that’s a valuable part of your coin model, you usually have to pay a price on the repudiation front.

Posted in Cryptography, Econ & Money | 6 Comments

Bitcoin Gets Compromised

Posted on June 20, 2011 by Michael Froomkin

Bad times at BitCoin Mountain.

[Update – 12:52 GMT] Account recovery page will be up tomorrow morning (Japan time)

We have almost completed the account recovery page and are waiting for result to unit tests and intrusion tests (and more than anything, don’t want to put something online and go to sleep just after, best way to get screwed), so the page will be put online tomorrow morning.

It will allow every user to claim ownership of their account based on proof such as deposits, withdraws, password (if complex enough), email or notarized documentation.

Once it is deemed enough users had the chance to get their account back, the exchange will be open again (opening time will be announced at least 24 hours in advance). It will still be possible to file claims for user accounts after this.

[Update – 6:30 GMT] Still here. Still working hard to get things online.

  • SHA-512 multi-iteration salted hashing is in enabled and ready for when we get users reactivating their accounts
  • We are going to push our relaunch time to 2:00am GMT tomorrow so we have time to launch a our new backend and withdraw passwords.

Thanks to everyone sending the supportive emails and our extremely patient users. 

 

 

[Update – 3:45 GMT] DO NOT DOWNLOAD ANYTHING

If you receive ANY email which seems coming from Mt.Gox asking you to download something (certificate, generating program, etc), DO NOT DOWNLOAD. Do not either input your password on any site which is not MTGOX.COM.

 

[Update – 2:06 GMT] What we know and what is being done.

  • It appears that someone who performs audits on our system and had read-only access to our database had their computer compromised. This allowed for someone to pull our database. The site was not compromised with a SQL injection as many are reporting, so in effect the site was not hacked.
  • Two months ago we migrated from MD5 hashing to freeBSD MD5 salted hashing. The unsalted user accounts in the wild are ones that haven’t been accessed in over 2 months and are considered idle. Once we are back up we will have implemented SHA-512 multi-iteration salted hashing and all users will be required to update to a new strong password.
  • We have been working with Google to ensure any gmail accounts associated with Mt.Gox user accounts have been locked and need to be reverified. 
  • Mt.Gox will continue to be offline as we continue our investigation, at this time we are pushing it to 8:00am GMT. 
  • When Mt.Gox comes back online, we will be putting all users through a new security measure to authenticate the users. This will be a mix of matching the last IP address that accessed the account, verifying their email address, account name and old password. Users will then be prompted to enter in a new strong password.
  • Once Mt.Gox is back online,  trades  218869~222470 will be reverted. 


We will continue to update as we find new information.

Huge Bitcoin sell off due to a compromised account – rollback

 

The bitcoin will be back to around 17.5$/BTC after we rollback all trades that have happened after the huge Bitcoin sale that happened on June 20th near 3:00am (JST).

One account with a lot of coins was compromised and whoever stole it (using a HK based IP to login) first sold all the coins in there, to buy those again just after, and then tried to withdraw the coins. The $1000/day withdraw limit was active for this account and the hacker could only get out with $1000 worth of coins.

Apart from this no account was compromised, and nothing was lost. Due to the large impact this had on the Bitcoin market, we will rollback every trade which happened since the big sale, and ensure this account is secure before opening access again.

UPDATE REGARDING LEAKED ACCOUNT INFORMATIONS

We will address this issue too and prevent logins from each users. Leaked information includes username, email and hashed password, which does not allow anyone to get to the actual password, should it be complex enough. If you used a simple password you will not be able to login on Mt.Gox until you change your password to something more secure. If you used the same password on different places, it is recommended to change it as soon as possible.

SERVICE RETURN

Service will not be back before June 20th 11:00am (JST, 02:00am GMT). This may be delayed depending on what is found during the investigation.

Posted in Cryptography, Econ & Money | 2 Comments

Bitcoin Has a “Black Friday”

Posted on June 14, 2011 by Michael Froomkin

If I’m reading this chart right, Bitcoins went from a high of over 30 late last week to a low of around 10, before rebounding somewhat to their current price in the higher teens (see updated prices here). A month ago a Bitcoin was trading well under 5 — maybe around 3.

I call Tulip Bulbs.

For more on this see DailyTech – Digital Black Friday: First Bitcoin “Depression” Hits.

Previous post: Why Bitcoin Isn’t As Exciting as it May Sound.

Posted in Cryptography, Econ & Money | Comments Off on Bitcoin Has a “Black Friday”