Tuesday, January 29, 2008

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?


Tom said...

There might have been lessons in free banking, had not the game owners imposed Deus ex machina "regulaion" from the outside. In the real world, no gods regulate banks, so it's going to be hard to extract any lessons.

Norman said...

I actually wrote my senior thesis on the topic of economics in virtual worlds, so I'm pretty familiar (although not with developments in SL in the last year or so). Fascinating stuff. If you're interested I'd love to talk about it some time.

Angus said...

Cool Beans!! Come by the non-virtual office and we can talk it over.