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The US government responded to the 2008 financial crisis with the Dodd-Frank Act of 2008 to protect everyone against the kind of speculation that caused that financial crisis.

Much of the financial legislation that regulates banks, payment systems, and other intermediaries is created in response to fraudsters and scammers.

There are lots of "shock asorbers" that you might not be aware of. In the US payments system, a pull-based payment system, when a merchant makes a request to pull funds from your bank account, your bank is liable for the funds if they authorize the transaction. This protects the merchant from not receiving their money. The whole network is filled with debits and credits and liabilities.

In fact it already is a distributed system that mirrors the social and political structures of moving value.

Another shock absorber is that state chartered banks that handle a certain volume of transactions must first prove they have enough funds in reserve to serve their liabilities. Again to protect consumers.

It's quite a fascinating industry and if you want to learn more about it there is an excellent book to get started [0].

However don't take the US system as the ideal model. There are more modern payment networks and protocols that enable transaction settlement in near real-time that is much more convenient and common in places like the EU and Canada.

[0] https://www.amazon.com/Payments-Systems-U-S-Third-Profession...

⬐ AnthonyMouse

> The US government responded to the 2008 financial crisis with the Dodd-Frank Act of 2008 to protect everyone against the kind of speculation that caused that financial crisis.

Let's review the 2008 financial crisis.

The was a thing called a credit default swap. It's a type of insurance. If you make a loan, and the borrower fails to pay you back, the insurance pays you instead.

The insurance actuaries did the math on how much these should cost based on the historical rate at which homeowners paid back their loans. They also calculated that most of the claims would be offset by the ability to foreclose on the house, so they'd only have to pay to the extent that the homeowner owed more on the mortgage than the house was worth. That seemed pretty unlikely, right?

Enter moral hazard. If you're a bank buying credit default swaps, you don't care one bit whether the borrower can pay back the loan, so you issue loans to everybody. Banks issuing loans to people who can't afford them inflates a housing bubble.

The regulators who should have seen this and said "hey wait a minute" instead said "neat, they're promoting home ownership" and just let it happen.

Then when those borrowers, in fact, can't afford the loan payments, they default.

Around the same time, the insurance companies figure out that they fucked up real bad, so the price of credit default swaps goes way up and banks stop buying more of them. Which means they stop wanting to loan money to people who can't afford to pay back the loans, and the housing bubble pops. That puts the existing loans underwater, which would bankrupt the insurance companies, which would in turn bankrupt the banks.

Then the "solution" became to set interest rates to zero to reinflate the housing bubble, where they've been ever since, and we now have an even bigger housing bubble than we did in 2007.

The cause of this was not a fraud or a scam. It wasn't "buffers" or anything like that. It was incompetence. Nobody wants to admit that, because anyone could have asked the question, what does a credit default swap do to a bank's incentive to vet creditworthiness? But they didn't.

⬐ agentultra

A good deal of US banking legislation came into being in response to various crises. Like the Federal Reserve Act in response to the Panic of 1907. It's pretty normal.

A lot of this legislation exists to provide buffers to protect people from all kinds of situations. That's why we have legislation and regulation.

⬐ AnthonyMouse

> A good deal of US banking legislation came into being in response to various crises. Like the Federal Reserve Act in response to the Panic of 1907. It's pretty normal.

It's also the financial equivalent of invading Iraq in response to 9/11.

If you want to learn more about this space, I'd check out Payment Systems in the U.S. [1] which talks about a lot of the history and parties at play here.

It's also fun/interesting to look at the published interchange rates for various classes of commerce. Here's Mastercard's: https://www.mastercard.us/content/dam/public/mastercardcom/n...

[1] https://www.amazon.com/Payments-Systems-U-S-Third-Profession...

Here is a good high level book [1] that touches this subject

[1] https://www.amazon.com/dp/0982789742/ref=cm_sw_r_cp_awdb_t1_...