No, Second Life's Bank Crash Did Not Predict Real World Bank Crash

from the get-real,-people dept

Wed, Nov 26th 2008 2:10pm — Mike Masnick

MSNBC is running an article claiming that last year's virtual bank collapse in Second Life somehow foretold the current financial crisis. It makes for a good headline, but it's simply not true. The factors that resulted in the real world financial crash, as compared to the one in Second Life were entirely different. While there may have been some similarities (people not taking the time to understand the risk of certain investments) to compare the two is a pretty big stretch. From there, the article gets even worse, pretending that both financial crashes show that free markets don't work.

That's simply not true.

The eventual crash actually does show that free markets can work properly, punishing those who took risks without fully understanding the risks. The response in Second Life, to ban banks like the one that crashed, seems like the wrong way to go about things as well. Yes, many people were fooled, and ended up losing money, but that should help educate people not to blindly rush into putting money in a totally unregulated "bank" that made promises that were clearly beyond reasonable (40% interest?). Having regulations that prevent outright fraud (lying) seem reasonable, but banning all banks in response to such a poorly run one seems like going to far. The problem isn't just with the fact that it was an "unregulated free market." It was with the fact that people blindly believed that something too good to be true was legit.

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Filed Under: bank crash, economy, free market, regulations, second life
Companies: linden lab

14 Comments

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Anonymous Coward, 26 Nov 2008 @ 2:21pm

Does anyone actually go into Second Life? I tried it and found it to be a god-awful boring waste of bandwidth.
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Bob, 26 Nov 2008 @ 2:53pm

I Do...
The Second Life Bank didn't crash either. The guy that ran it up and ran off with the money.

Kind of different from what Banks are experiencing today.
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SteveD, 26 Nov 2008 @ 3:40pm

Re: I Do...
Some would disagree.
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Sigmund Leominster, 27 Nov 2008 @ 7:35pm

Naive Parallelism at its best
Once again we see the human tendency to see patterns where none exists being parading full force. If the parallel is that "there was too much credit and that caused things to go wobbly," then the best you can say is that this happened in Second Life last year and is similar to what happened this year in the real world. But this is naive parallelism. To say it "predicted" anything is silly. Just because A looks like B doesn't mean A caused B.

Must have been a slow day in the newsroom. Coming up, did Star trek predict the flip-phone and should Paramount pictures sue for copyright infringement?
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Colin, 28 Nov 2008 @ 9:20am

common sense
"The problem isn't just with the fact that it was an "unregulated free market." It was with the fact that people blindly believed that something too good to be true was legit."
Greed will always trump common sense. Be it in a game or in the real world.
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Intertubes, 28 Nov 2008 @ 2:55pm

Oh come on, were you in there Mike to see the situation first hand, or are you just the most knowledgeable person on the planet? Actually the Second Life situation did foreshadow the real in that the micro-model proved that having zero regulation and oversight in financial institutions does lead to an untenable situation. While the specifics might be different, the results were similar: no oversight led to greed which led piss poor investing and lending policy which led to collapse. There are lessons to be learned from both.
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RKL, 28 Nov 2008 @ 5:14pm

Re: Re: I Do...
lol. well played sir.
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David Pirko, 28 Nov 2008 @ 6:57pm

Free market
It always makes me smile when people have the free market argument. Unfortunately, a free-market is an idea akin to that of utopia; in the sense that the very definition of utopia prevents it from ever being realized. The same with a free market. The government is not the only actor capable of shaping the market, numerous institutions of economic and social standing of course play the market trying to force the situation their way. This effort to create an advantage to one player over another in a market effectively renders a free-market over.
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Anonymous Coward, 29 Nov 2008 @ 1:30pm

"...While there may have been some similarities ...to compare the two is a pretty big stretch. ...pretending that both financial crashes show that free markets don't work.

That's simply not true."

You note the similarities, can't identify any differences but insist there is no relation. The only thing that convinces you that you are right is your religion.
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mightymaz, 30 Nov 2008 @ 3:50am

"The eventual crash actually does show that free markets can work properly, punishing those who took risks without fully understanding the risks."

Er, no it doesn't since the people that take the punishment are almost exclusively the tax payers not the risk takers.

You really should get past your blind faith.
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barrenwaste, 30 Nov 2008 @ 12:18pm

RE: Mightymaz
""The eventual crash actually does show that free markets can work properly, punishing those who took risks without fully understanding the risks."

Er, no it doesn't since the people that take the punishment are almost exclusively the tax payers not the risk takers.

You really should get past your blind faith."

You really didn't think that arguement through, did you? Why do the tax payers get hit with an increase due to a companies spectacular failings? Cause the companies know the government will bail them out if they cause enough debris during the crash. Of course, this can't be laid at the feet of a free market, because in a free market the government wouldn't bail out the company. Yes, there are wide spread effects when large companies fall hard, but if the full effects are allowed to be felt by the populace then they will learn to put more thought and effort into choosing what companies they use. Look at credit cards for an example of American Consumer Stupidity. Look into the costs to the businesses and private citizen.

Think this is to harsh? Well, make a choice, feel the effects and have an involved and educated populace, or let the government bail out every idiot and scam victim and turn the country into lethargic mindless drones and unaccountable shysters.
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Mike (profile), 30 Nov 2008 @ 7:06pm

Re:
Er, no it doesn't since the people that take the punishment are almost exclusively the tax payers not the risk takers.

The taxpayers getting punished is not the free market. It's the opposite.
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Mike (profile), 30 Nov 2008 @ 7:09pm

Re:
Actually the Second Life situation did foreshadow the real in that the micro-model proved that having zero regulation and oversight in financial institutions does lead to an untenable situation.

This is not true at all. The SL scenario did have zero regulation, but the actual financial world system had a ton of regulation -- it was just misplaced. The scenarios are quite different.

And, no, having no oversight concerning financial institutions does not automatically lead to an untenable situation. People not understanding risk leads to an untenable situation.

While the specifics might be different, the results were similar: no oversight led to greed which led piss poor investing and lending policy which led to collapse.

No, sorry. Greed remains pretty much constant. It's not "greed" that's the problem. You can't stop greed. The problem is bad information, which leads people to think that highly risky investments are not risky.
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mightymaz, 1 Dec 2008 @ 10:56am

Re: RE: Mightymaz
You really didn't think that arguement through, did you?

"...Why do the tax payers get hit with an increase due to a companies spectacular failings? Cause the companies know the government will bail them out..."

So they know they're not is a free market and so they don't behave like it.

I agree with Mike "The taxpayers getting punished is not the free market. It's the opposite."
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