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“There’s Always Bitcoin”: Your Credit Card Has A Dangerous Flaw That The Banks Refuse To Fix

Hackers stole payment records on as many as 110 million customer accounts from Target over the holiday shopping season, in one of the largest data security breaches in history. The company has struggled to regain customers’ trust, with noticeable drop-offs in sales since they disclosed the breach on December 19. And Target is not alone in what looks like an identity theft epidemic. Neiman Marcus announced a similar hack of payment records, and at least three more major retailers could come forward in the next several weeks. As more and more customers have reported fraudulent charges, Congress has begun to ask questions about why this happened.

Here’s an answer: The United States has one of the worst payment systems in the entire world, inviting fraud and increasing hassles for anyone who wants to exchange money. In this case, a simple credit protection available on virtually all payment cards outside the U.S. could have dramatically narrowed the scope of the Target breach. It hasn’t happened here, mainly because banks don’t want to spend the money to upgrade the system, writing off the hassle and expense of your identity fraud as a cost of doing business.

Almost alone among developed nations, U.S. credit and debit cards have a magnetic stripe that contains all the financial information necessary to make a purchase. Once information gets stolen from a merchant, it can be encoded into a magnetic stripe and used with a new card. Smart cards in Europe and elsewhere encrypt that data and store it on a microchip, which is much tougher to replicate. More important, the cards also require a personal identification number (PIN) to work. This “chip-and-PIN” system introduces a second authentication, forcing thieves to have both pieces of information to successfully use the card. It’s a combination of advanced technology and simple common sense.

Chip-and-PIN would not have prevented hackers from stealing payment information from Target’s databases, but would have made it more difficult to use the records. Because of this, says Georgetown law professor Adam Levitin, would-be identity thieves would have a lower incentive to steal the data in the first place. “Like Willie Sutton says, bank robbers go where the money is,” he said. “Fraud will always find the weakest link. Now that the rest of world has gone to chip-and-PIN, we’re the weakest link.” Nearly half of all card losses in 2012 occurred in the U.S., according to the trade journal the Nilson Report.

Though 130 countries around the world have phased out their magnetic stripe cards (which you may have noticed if you’ve tried to use a credit card overseas), the U.S. has lagged behind, with both merchants and banks assigning the blame to each other. Retailers need new card readers to handle chip-and-PIN cards, and they can be costly; it’s why only 10 percent of U.S. merchants have upgraded. The merchants don’t want to spend the money until they know banks will issue chip-and-PIN cards. And the banks don’t want to spend money on the more expensive cards until merchants install the card readers. So both sides are effectively telling the other to go first. With no regulatory mandates for anyone, this standoff could continue for years, with consumers paying the price.

“This is different than it has worked everywhere in the world,” said Adam Levitin. “Elsewhere, issuers and merchants have moved in lockstep.”

Some analysts place the blame squarely on banks, arguing that merchants eat the majority of the fraud costs, giving banks no incentive to upgrade. In addition, blogger and author Yves Smith notes that the banks sell the card reader equipment to the merchants, and they have inflated the price. “The impediment is almost assuredly the price point the banks have set,” Smith writes.

Credit card networks like Visa and MasterCard introduced the Payment Card Industry (PCI) Security Standards, which are supposed to provide more anti-fraud controls. But that effectively tries to band-aid an inherently insecure magnetic stripe system. More recently, the card networks proposed a shift in liability rules that they hope will nudge banks and merchants toward upgrading. By October 2015, if the merchant has a chip reader and the card has a traditional magnetic stripe, the bank will be liable for any fraud. Likewise, if a chip-and-PIN card is presented to a merchant with no chip reader, the merchant will be liable. In other words, both sides will be penalized for not upgrading to the chip-and-PIN system.

But again, this is voluntary. And in the meantime, both merchants and issuers manage to absorb the costs of fraudulent purchases (which total around five cents per $100 charged, according to the industry). They consider this cheaper than the costs of upgrading. In fact, one facet of the current system is a profit center for the banks. When a fraud transaction goes through, merchants reverse it through something called a charge-back. Merchants must pay the same fee to reverse a charge that they do to swipe one through, along with additional fees. “The retailers say, ‘we’re having to pay to not be paid,’” Adam Levitin said.

This reluctance to upgrade in the U.S. has led to a general creakiness in the payment system. Most U.S. retailers don’t even have real-time authorization capabilities, making it more difficult to detect fraud at the point of sale. The Automated Clearing House (ACH) system can take days to process transactions, wasting time and increasing costs for customers. Banks have outdated processing systems and have been similarly reluctant to upgrade them. Says Levitin, “We’re still using horse and buggies.”

Meanwhile, other countries have leapt past the U.S. In Kenya, the M-Pesa system allows consumers to pay for virtually anything by mobile phone. It has become widely adopted by merchants, making the African nation a world leader in mobile money. Mobile transactions over M-Pesa hit $19.6 billion in 2013. (Attempts to create mobile payment systems in the U.S. are in the startup phase, with entrepreneurs literally going from one business to the next to find retailers willing to use it.)

Levitin argues that America’s previous position as a payments system leader led to its slow pace in keeping up with new technologies. “The reason we’ve lagged behind is because we were ahead,” he said. “Everyone else had to upgrade, while our card system networks were making money. Kenya just didn’t have a regular banking infrastructure. The alternative to M-Pesa is paying in cattle.” Similarly, Europe upgraded to chip-and-PIN because credit card authorization was typically done through phone lines, and 10 years ago, European telecom costs were fairly expensive. “Our technology was not bad enough to upgrade,” Levitin says.

Congress is highly unlikely to get involved in an argument between banking lobbyists and retailer lobbyists. They learned their lesson when trying to legislate “swipe fees,” what banks charge retailers to process credit and debit card transactions. The result was a knock-down, drag-out affair that took months to negotiate.

But the Target breach, and the reputational risk to the big box store, has both merchants and banks rethinking the consequences of maintaining a substandard old system. Mallory Duncan, general counsel for the National Retail Federation, said this week at the trade group’s annual convention that they now encourage members to upgrade to chip-and-PIN card readers, saying “The technology that exists in cards out there is 20th-century technology and we’ve got 21st-century hackers.” And banks have responded to complaints by gradually distributing dual-use cards with magnetic strips and chip-and-PIN technology, mostly to frequent foreign travelers. U.S. Bank expects all its customers to have the cards by next year.

So there’s a chance that the U.S., like a lumbering giant, will finally make the move to more secure payment systems. Failing that, there’s always Bitcoin.


By: David Dayen, The New Republic, January 16, 2016

January 17, 2014 Posted by | Cybersecurity | , , , , , , , , | Leave a comment

“No, Poverty Is Not The Fault Of The Poor”: Remember Folks, The Banks Crashed The Economy

We’re starting to prep for “poverty day” around these parts–it’s next Tues, 9/17–the Census Bureau will release the poverty and household income results for last year. There’s lots of rich data and both CBPP and yours truly will have much to say about the results.

But in prepping for a presentation on this stuff for tomorrow, I made the graph below, just showing the sharp increase in the official poverty rate over the great recession. I’ve noted in many posts the limits of the official measure, most importantly re the dates shown in the figure, how it leaves out many of the safety net benefits that expanded to offset the downturn.

But to explain what struck me in gazing upon this simple figure below, we’re actually better off looking at the incomplete official rate. How can it make any sense to blame the poor themselves, as per Charles Murray, Paul Ryan, along with pretty much the rest of the House R’s caucus, for this increase in poverty in the midst of the worst downturn since the Great Depression?

How is it that those of us trying to argue on behalf of providing the poor with the opportunities they need are so often back on our heels, defending the increase in the SNAP (i.e., food stamp) rolls against those who claim the safety net is a hammock? Did the poor come up with the financial “innovations” that inflated the housing bubble? You know, the one that imploded and took the economy down with it…how about the bubble? Was that also the dastardly work of the bottom 20%?

Perhaps I’m a little sensitive after this debate earlier today on CNBC. Or maybe it’s the juxtaposition of the finance sector’s recent profitability and the flack the $15/hr fast-food strikers are getting from the economic elites.

But really, it’s time to get on offense here, my friends. Listen, elites: you want less people on food stamps? Fine…then stop screwing up the economy. Then we’ll talk. Until then—until we’re back around full employment, until you stop blowing bubbles, I really don’t want to hear from you about hammocks and the bad decisions of the poor. You want to talk job creation, infrastructure investment, skills training, mobility, opportunity—I’m all ears. Otherwise, quiet down and get to work.

OK…rant over.




By: Jared Bernstein, Salon September 10, 2013

September 11, 2013 Posted by | Economic Inequality, Poverty | , , , , , , , | Leave a comment

“Hating On Ben Bernanke”: Mitt Romney Takes Up Residence In The Right’s Intellectual Fever Swamps

Last week Ben Bernanke, the Federal Reserve chairman, announced a change in his institution’s recession-fighting strategies. In so doing he seemed to be responding to the arguments of critics who have said the Fed can and should be doing more. And Republicans went wild.

Now, many people on the right have long been obsessed with the notion that we’ll be facing runaway inflation any day now. The surprise was how readily Mitt Romney joined in the craziness.

So what did Mr. Bernanke announce, and why?

The Fed normally responds to a weak economy by buying short-term U.S. government debt from banks. This adds to bank reserves; the banks go out and lend more; and the economy perks up.

Unfortunately, the scale of the financial crisis, which left behind a huge overhang of consumer debt, depressed the economy so severely that the usual channels of monetary policy don’t work. The Fed can bulk up bank reserves, but the banks have little incentive to lend the money out, because short-term interest rates are near zero. So the reserves just sit there.

The Fed’s response to this problem has been “quantitative easing,” a confusing term for buying assets other than Treasury bills, such as long-term U.S. debt. The hope has been that such purchases will drive down the cost of borrowing, and boost the economy even though conventional monetary policy has reached its limit.

Sure enough, last week’s Fed announcement included another round of quantitative easing, this time involving mortgage-backed securities. The big news, however, was the Fed’s declaration that “a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the economic recovery strengthens.” In plain English, the Fed is more or less promising that it won’t start raising interest rates as soon as the economy looks better, that it will hold off until the economy is actually booming and (perhaps) until inflation has gone significantly higher.

The idea here is that by indicating its willingness to let the economy rip for a while, the Fed can encourage more private-sector spending right away. Potential home buyers will be encouraged by the prospect of moderately higher inflation that will make their debt easier to repay; corporations will be encouraged by the prospect of higher future sales; stocks will rise, increasing wealth, and the dollar will fall, making U.S. exports more competitive.

This is very much the kind of action Fed critics have advocated — and that Mr. Bernanke himself used to advocate before he became Fed chairman. True, it’s a lot less explicit than the critics would have liked. But it’s still a welcome move, although far from being a panacea for the economy’s troubles (a point Mr. Bernanke himself emphasized).

And Republicans, as I said, have gone wild, with Mr. Romney joining in the craziness. His campaign issued a news release denouncing the Fed’s move as giving the economy an “artificial” boost — he later described it as a “sugar high” — and declaring that “we should be creating wealth, not printing dollars.”

Mr. Romney’s language echoed that of the “liquidationists” of the 1930s, who argued against doing anything to mitigate the Great Depression. Until recently, the verdict on liquidationism seemed clear: it has been rejected and ridiculed not just by liberals and Keynesians but by conservatives too, including none other than Milton Friedman. “Aggressive monetary policy can reduce the depth of a recession,” declared the George W. Bush administration in its 2004 Economic Report of the President. And the author of that report, Harvard’s N. Gregory Mankiw, has actually advocated a much more aggressive Fed policy than the one announced last week.

Now Mr. Mankiw is allegedly a Romney adviser — but the candidate’s position on economic policy is evidently being dictated by extremists who warn that any effort to fight this slump will turn us into Zimbabwe, Zimbabwe I tell you.

Oh, and what about Mr. Romney’s ideas for “creating wealth”? The Romney economic “plan” offers no specifics about what he would actually do. The thrust of it, however, is that what America needs is less environmental protection and lower taxes on the wealthy. Surprise!

Indeed, as Mike Konczal of the Roosevelt Institute points out, the Romney plan of 2012 is almost identical — and with the same turns of phrase — to John McCain’s plan in 2008, not to mention the plans laid out by George W. Bush in 2004 and 2006. The situation changes, but the song remains the same.

So last week we learned that Ben Bernanke is willing to listen to sensible critics and change course. But we also learned that on economic policy, as on foreign policy, Mitt Romney has abandoned any pose of moderation and taken up residence in the right’s intellectual fever swamps.


By: Paul Krugman, Op-Ed Contributor, The New York Times, September 16, 2012


September 19, 2012 Posted by | Election 2012 | , , , , , , , , | Leave a comment

“A Virtuous Cycle”: At Least The Federal Reserve Is Not Obsessing About The Budget Deficit

With deficit hawks circling overhead, the responsibility for creating jobs has fallen by default to Ben Bernanke and the Federal Reserve. Last week the Fed said it expected to keep interest rates near zero through mid 2015 in order to stimulate employment.

Two cheers.

The problem is, low interest rates alone won’t do it. The Fed has held interest rates near zero for several years without that much to show for it. A smaller portion of American adults is now working than at any time in the last thirty years.

So far, the biggest beneficiaries of near-zero interest rates haven’t been average Americans. They’ve been too weighed down with debt to borrow more, and their wages keep dropping. And because they won’t and can’t borrow more, businesses haven’t had more customers. So there’s been no reason for businesses to borrow to expand and hire more people, even at low interest rates.

The biggest winners from the Fed’s near-zero rates have been the big banks, which are now assured of two or more years of almost free money. The big banks haven’t used the money to refinance mortgages – why should they when they can squeeze more money out of homeowners by keeping them at higher rates? Instead, they’ve used the almost free money to make big bets on derivatives. If the bets continue to go well, the bankers will continue to make a bundle. If the bets sour, well, you know what happens then. Watch your wallets.

The truth is, low interest rates won’t boost the economy without an expansive fiscal policy that makes up for the timid spending of consumers and businesses. Until more Americans have more money in their pockets, government spending has to fill the gap.

On this score, the big news isn’t the Fed’s renewed determination to keep interest rates low. The big news is global lender’s desperation to park their savings in Treasury bills. The euro is way too risky, the yen is still a basket case, China is slowing down and no one knows what will happen to its currency, and you’d have to be crazy to park your savings in Russia.

It’s a match made in heaven – or should be. Because foreigners are so willing to buy T-bills, America can borrow money more cheaply than ever. We could use it to put Americans back to work rebuilding our crumbling highways and bridges and schools, cleaning up our national parks and city parks and playgrounds, and doing everything else that needs doing that we’ve neglected for too long.

This would put money in people’s pockets and encourage them to take advantage of the Fed’s low interest rates to borrow even more. And their spending, in turn, would induce businesses to expand and create more jobs. A virtuous cycle.

Yet for purely ideological reasons we’re heading in the opposite direction. The federal government is cutting back spending. It’s not even helping state and local governments — which continue to lay off teachers, fire fighters, social workers, and police officers.

Worst of all, we’re facing a so-called “fiscal cliff” next year when $109 billion in federal spending cuts automatically go into effect. The Congressional Budget Office warns this may push us into recession – which will cause more joblessness and make the federal budget deficit even larger relative to the size of the economy. That’s the austerity trap Europe has fallen into.

Mitt Romney has been criticizing the Obama administration for not doing more to avoid the cliff, but he seems to forget that congressional Republicans brought it on when they refused to raise the debt ceiling. They then created the cliff as a fall-back mechanism. Romney’s vice-presidential pick Paul Ryan, chair of the House budget committee, voted for it.

It’s a mindless gimmick that presumes our biggest problem is the deficit, when even the Fed understands our biggest problem right now is unemployment. Yet even the nation’s credit-rating agencies have bought into the mindlessness. Last week Moody’s said it would likely downgrade U.S. government bonds if Congress and the White House don’t come up with a credible plan to reduce the federal budget deficit. (Standard & Poor’s has already downgraded U.S. debt.)

Hello? Can we please stop obsessing about the federal budget deficit? Repeat after me: America’s #1 economic problem is unemployment. Our #1 goal should be to restore job growth. Period.

The Federal Reserve Board understands this. And at least it’s trying. But it can’t succeed on its own. Global lenders are giving us a way out. Let’s take advantage of the opportunity.


By: Robert Reich, Robert Reich Blog, September 15, 2012

September 16, 2012 Posted by | Election 2012 | , , , , , , , , | Leave a comment

“Bumpkin-In-Chief”: Romney Promises Libor-Scandal Banksters He’ll Score For Them

Of course Mitt Romney’s arrival in London was awkward. Mitt Romney’s arrival anywhere is awkward.

But don’t think that Romney’s jaunt across the pond has been a complete disaster.

Aside from some public relations missteps, he has accomplished precisely what he set out to do.

Admittedly, the missteps have been serious.

Romney’s bumpkin-in-chief beginning in London was epic: he suggested the Brits had done a poor job organizing the Olympics, violated international security protocols and struggled to keep the names of his hosts straight. Britain’s Sun, a particularly conservative tabloid, went so far as to dub him “Mitt the Twit” on a frontpage that the Brits—and plenty of American Democrats—will dub a “keeper.”

What with an aide making cryptic comments about how Romney has a better understanding than President Obama of “Anglo-Saxon heritage,” nothing about the presumptive Republican presidential nominee’s step onto the global stage seemed to go right.

Except, of course, for the real purpose of the trip, which was to collect cash from the most scandal-plagued of London’s financial insiders— and to assure the embattled banksters that he would, if elected, use the power of the presidency to protect them from regulation and oversight.

That task Romney managed with the agility of the “vulture capitalist” described by his Republican primary foes.

Within the well-guarded confines of London’s posh Mandarin Oriental hotel Thursday night, Romney met with at least 250 of the top bankers, speculators and financial manipulators in the world—including representatives of Barclays, the bank that recently paid almost $500 million in fines after its officials were charged with providing false information to interest-rate regulators.

Most candidates would have shied away from bankers who were, and are, at the center of the Libor-rigging scandal. But Romney embraced them.

Barclays chief executive Bob Diamond had to withdraw as a co-chair of Romney’s London fundraiser festivities—after Diamond was forced out of his position and then dragged before a Parliamentary select committee for a round of “what did you know and when did you know it” questioning about the filing of false reports and the manipulation of global markets. Embarrassing? Not really. The no-shame-when-it-comes-to-money-grabbing Romney campaign just made another Barclays insider a co-chair, along with representatives of of Bank of Credit Suisse, Deutsche Bank, HSBC, Goldman Sachs, Blackstone and Wells Fargo Securities—and, of course, Bain Capital Europe.

What was Romney thinking?

First and foremost, he wanted the estimated $2 million in campaign contributions that the global financiers ponied up Thursday night.

But the Republican presidential candidate came to London to offer the the scandal-plagued bankers something in return for the checks that were delivered in increments of as much as $75,000: reassurance that he really is one of them. And that a Romney presidency would serve their interests.

Referring to the signature Wall Street regulatory reform of the Obama presidency, Romney reassured the bankers that “I’d like to get rid of Dodd Frank and go back and look at regulation piece by piece.”

While he couldn’t quite get the hang of international diplomacy, Mitt Romney was entirely comfortable standing on foreign soil and promising international bankers that, as president, he would take care of them.


By: John Nichols, The Nation, July 27, 2012

July 29, 2012 Posted by | Election 2012 | , , , , , , , , | Leave a comment

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