Are there lessons for free banking in the Second Life Fiasco?
In the virtual world Second Life, they had a version of free banking. People could open banks, take deposits and pay interest and compete for deposits with other virtual banks. Linden Labs, the "game's" creator, took a Laissez-Faire no regulation attitude.
Apparently many of these banks collapsed after offering extremely high interest rates (over a 40% annual rate) to attract deposits, using the funds for speculative virtual investments and going broke leaving depositors holding the proverbial bag. In other words, fraud!
Some stories are here, here, and here.
Supposedly one bank's collapse produced over $500,000 in real money losses to its depositors.
Now I don't know much about virtual worlds or free banking theory, but this can't be good, right? Maybe at least it would make a good test question on Bryan Caplan's monetary theory midterm? Can these virtual worlds help us learn anything about real economies?