MSNBC News: "Second Life Bank Crash Foretold Financial Crisis"

In a November 21st, 2008 article for MSNBC.com, journalist Jeremy Hsu asserted that the collapse of Ginko Financial foretold the US Subprime Credit Collapse and resulting bank failures and stock market plunges. It is easy to draw broad analysis to the situations, and perhaps more appropriately, the recent Linden Lab's Openspace Policy Change to a collapse of the US Housing Bubble, but Hsu was happy with using only web-searchable information that is over a year old.

"A string of bank collapses prompted Alan Greenspan, U.S. economic guru and former head of the Federal Reserve, to admit last month that lending institutions could not always be trusted to regulate themselves. He could have taken a cue sooner by looking at the 2007 collapse of Ginko Financial, a virtual investment bank in the online game "Second Life."

"Virtual economies in games such as "Second Life" and "EVE Online" may seem trivial, but they actually can provide real-life lessons on the patterns of free markets and unfettered capitalism. Researchers and self-described virtual economists have observed how virtual entrepreneurs establish themselves and compete, as well as how a lack of self-regulation can lead to dramatic banking failures, scams and even corporate espionage."

Echoing sentiments made by most CEO's and Private Company Owners in Second Life who have seen any amount of success, Robert Bloomfield (SL Name: Buyers Sellers), host of the widely popular weekly sl television show Metanomics, and in Real Life an accounting researcher at Cornell University in Ithaca, New York, told MSNBC, "I don't view 'Second Life' as a game, I view it as a market space."

A great portion of Intlibber Brautigan's Octoboer Metanomics appearance was given to this same topic.

Hsu then described the meteoric crash of Ginko Financial: "Ginko had all the trademarks of a bad investment idea. It promised that people who deposited their virtual money would earn an astronomical interest rate of more than 40 percent, and similarly loaned out money with absurdly high interest rates attached to repayments. Thousands of "Second Life" residents opened accounts with the bank.

"The end came when panicked investors began withdrawing their virtual money, known as Linden dollars in the game and exchangeable for U.S. dollars at a rate of roughly 250 Linden dollars to one U.S. dollar. Ginko did not have enough reserves to pay up. When the bank finally announced it was finished, an equivalent of $750,000 in real-world U.S. dollars went up in smoke. The collapse not only wiped out time spent earning Linden dollars in the game, but also hit the wallets of players who had legally paid U.S. dollars to buy Linden dollars."

Bloomfield then stated for Hsu, "The 'Second Life' financial markets have pretty much been unregulated. There are accusations that people are doing everything from questionable behavior to outright fraud."

Hsu then later outlines, "Previous "Second Life" banks had dubious operations and spectacular collapses, but the Ginko collapse led to renewed outcry for regulatory action from "Second Life" residents. Linden Lab responded by outright banning banks that promised any sort of interest rate returns on deposits. By contrast, the United States and other nations have responded to the real-world financial crisis by trying to save banks and encourage responsible lending."

The big-brush analogy tends to miss the fact that the US Economic Crisis was caused not by a lack of Government Interventionism---not in allowing a "wild west economy" as Hsu refers to Second Life---but in the wrong intervention in the wrong ways, such as forcing sub-prime housing loans on viable corporations, and then those corporations selling these assets on the open market to secondary capital firms. There are few financial professionals who would claim that Regulation is non-existant in the US Financial Sector.

Recent calls from the Virtual Stock Exchange Communications and Public Relations Director Samantha Goldflake for a new "Market Consortium" to oversee and universalize certain areas of the four active Second Life stock exchanges resembles previous attempts by members of the SL financial community to set up regulatory agencies, such as the Second Life Exchange Commission.