Your Money is Safe Because it's Never Really Yours

Also; We Cannot "End the Fed"

Patrick McKenzie has written a brilliant explanation of ACATS – the Automated Customer Assets Transfer System – detailing the laws, regulations, systems and concrete practices by which financial accounts get transferred from one institution to another. (Think moving your pension/401k/403b to a different brokerage account.) Anyone at all interested in learning the technical details should absolutely read his post.

But I understand one of my jobs in writing this newsletter as being able to show my readers – many of whom are absolutely not interested in the technical details of financial transactions – why things like this really do matter. And something seemingly as dry as ACATS actually provides an important window onto money/power.

Here are the most important takeaways from McKenzie’s piece:

• Financial institutions have a strong incentive, one they have acted on historically, to prohibit, discourage, or dramatically slow the transfer of financial assets out of their institution. It’s much much easier to run a hedge fund or a brokerage, or for that matter, a Ponzi scheme, if customers can never leave and take their money with them.

• The current regulatory regime thus aims primarily to fix the above problem; it does so by insisting that both the institution transferring the funds and the new institution receiving the funds move quickly to get those funds transferred.

• The response to this regime is a set of standard practices that would shock most people: other people can sign in the name of the account holder, signatures are not verified, and most mind-blowing, “most ACATS requests will cause the brokerage losing the assets to not verify with their customer that the request is authorized” (emphasis added). You heard that right: someone can initiate a transfer of all your retirement funds out of your brokerage account, and the brokerage itself will probably not even check to see if you were really the person initiating the transfer.

• This creates a fantastic opportunity for the crime of financial fraud! And indeed, a lot of criminals are hard at work in this domain, trying to transfer accounts (often by just serially guessing where the original account is held) and then wire out the money from the new account.

McKenzie thus concludes by posing to himself the question he knows his readers will all be asking: how worried should I be that a crook is going to drain my entire life-savings without my even learning about it until I do my quarterly (or annual!) check of my 401k/403b account? Don’t worry, he says:

Many people think that when your money is taken without your consent from a regulated financial institution that you’ve been stolen from in the same way as being mugged for the contents of your wallet in San Francisco: society expresses sympathy, kinda, but you’re never going to see that money again.

Finance. Does. Not. Work. This. Way.

If your brokerage makes a mistake with your assets, and they have before and will again make many mistakes, then they will make you whole. Financial institutions have capital for a reason. There is a budget for operating losses. There is a budget for fraud losses. The aggregate expenditure of effort by society in solving this problem greatly exceeds the aggregate expenditure of effort by society in solving muggings.

There is just so much good stuff to unpack here!

Money is not a thing. You cannot hold it in your hand and possess it exclusively. I mean “exclusively” in both the literal etymological sense, and the Lockean sense: a right of property is a right of exclusion, because to say “this is mine” is to say that no one else can make a legitimate claim on “this.” For something to be mine is for it to be mine alone; no one else matters, and there is no relation to others.¹

But money is relational in its very nature. To have money is not to possess an object but to “hold” (in a very much metaphorical sense) a claim on some other party – my debtor. The digits in my account, held on the ledger at my brokerage, are not things I can possess (which could therefore be stolen) but merely a measure of my brokerage’s debt to me. The fraudulent transfer of my “assets” out of the account creates a huge mess for my brokerage (and for me!), but – this is the key – it does not alter my fundamental money-claim on my brokerage. In a sense (a very important sense) they still owe me when the money is gone, and since “the money” is really nothing other than their owing me, there’s another sense in which the money isn’t gone.

Because money in our capitalist societies is the necessary and in many ways highest form that value takes, we really really really wish that we could hold and secure money. We want it to be ours, safely. We want to hold it exclusively, just like Locke told us we could hold our property (it was properly ours, and ours alone). We want to guarantee future value.

But that’s not how money works, because it’s not how value works under capitalism. Our money can always disappear because it is nothing other than a claim on a debtor. We don’t “realize the value” of money until we spend it, so all the money held in our accounts must always remain precarious: we plan to spend it in the future, but in the future our debtor might go bust and the money will disappear.

Notice that our anxieties about our money are therefore often misplaced: the financial fraudster is not a huge threat to us as long as our debtor is liquid, solvent, well-capitalized, and has political/regulatory and other reasons to make us whole.² In that context, the thief is no danger to us. But if our financial institution makes some risky moves in the money markets, an analyst (or some dude on twitter) calls into question their solvency and sparks a bank run, and the next thing we know “our money is gone” because it was never “there” in the first place. It was always only a claim on a debtor.

The above merely rehearses, through McKenzie’s striking case study, the nature of money as I have often tried to detail it. Just as important is McKenzie’s final sentence: the entire banking system, regulatory framework, and political structure has developed and accreted over decades and decades in order to make it much much easier for a senior citizen defrauded of their life’s nest-egg to get their money back than it is for anyone to get their wallet back after being mugged.

I don’t think McKenzie means to imply that’s a good thing. I certainly don’t. But I do think he means for us, even if begrudgingly, to extend some admiration to the fact that this problem can and has been solved, and it has been solved, not by a tech founder/innovator/genius, but by what he calls society - by a complex sociopolitical system.³ The bank system is, if nothing else, an ever complicated, ever shifting, social and political apparatus, a complex set of systems/structures/practices that make it possible for citizens to hold and transfer money-credits reliably and consistently. And since a capitalist social order depends on those fundamental facts (the existence and reliable transfer of money-credits) as both the starting and ending point for capitalist production, distribution, and exchange, then this banking system itself helps sustain our very social order (for all its good and ill).

You can’t do that with gold. You can’t do that with the blockchain as understood through the mantra “code is law.” The system requires overlapping and intricate levels of dependency, precarity, vulnerability, and trust. Does today’s banking and financial system also currently function in such a way as to preserve and drive massive inequality? Absolutely it does.

But one cannot transform or improve societal systems by attempting to exit from society. McKenzie’s post was published the day before Donald Trump – the nominee, to be clear, of the Republican Party – spoke to the national convention of the US Libertarian Party. As the NY Times reports, Trump’s audience divided roughly evenly between those who hewed somewhere close to libertarian principles, and true MAGA supporters. The former booed and the latter cheered, both loudly, and all was chaos.

Often, the cycle ended only when someone began chanting, “End the Fed,” a unifying policy plank that everyone in attendance seemed to agree on.

The libertarians want to end societal arrangements and entanglements, to do away with human dependence on other humans, so as to return to their pretend state of nature – wherein no one needs anyone else and no one takes their (the libertarians’) property. This vision, of course, requires them to think about money as if it were property (GOTO beginning of post!).

Trump and Trumpists want to replace all those societal structures and financial arrangements with the pure sovereign/populist power of Trump himself. I wouldn’t be the first to point out how that would be bad for democracy. But perhaps it’s also worth pointing out that it would be bad for money. Right now your money is safe because it’s never really yours, but if you get rid of the fabric of commercial and central banking⁴, there might be nothing there at all. And whether we like it or not, as long as we live in capitalist societies, what’s bad for money would be very bad for society.

1. Readers of this all-too-brief rehearsal of a liberal theory of property should be hear a slightly cynical tone in my voice. That is to say, I’m not trying to legitimate, much less naturalize this theory of property, which has a whole host of problems. But I needn’t go into those problems here, since my purpose is only to show that money is not like property.

2. Regular readers of this newsletter will notice that these descriptors really do not apply to crypto exchanges.

3. As McKenzie nicely expounds, the regulatory body in question here, FINRA, is not actually a government agency; it’s a “self-regulatory organization” (SRO) created by the industry. This is very important: no one should expect FINRA to act the way the FDIC or the SEC acts. But despite not being a governmental entity, FINRA is still very much a political creature, because it comes into existence in anticipation of, and in an attempt to forestall precisely a governmental regulatory body. FINRA self-disciplines in the hopes that the government won’t have to, but that’s still disciplinary power.

4. My upcoming newsletter, now titled, “We Need to Talk About Banks” will go into much greater detail about how our money is bank money (deposits in commercial banks) and how that money only works if banks also have a different money with which to pay one another; that’s central bank money. “End the Fed” and you end money as we know it.