SecondLife Bans Unregistered In-World Banks

GuruBuckaroo writes "Virtual Ponzi schemes — pardon, "Banks" — have finally been given the boot by the policymakers at Linden Lab's Second Life. According to the company's latest blog post: 'As of January 22, 2008, it will be prohibited to offer interest or any direct return on an investment (whether in L$ or other currency) from any object, such as an ATM, located in Second Life, without proof of an applicable government registration statement or financial institution charter. We're implementing this policy after reviewing Resident complaints, banking activities, and the law, and we're doing it to protect our Residents and the integrity of our economy.'"

Comments

Re:That should've been done day one.

[Kris_J]

It's a shame the high profile failure wasn't actually a Ponzi scheme. The insanely high interest rate was supported by the massive profits of in-game gambling. The bank failed when gambling was banned (or seriously reigned in).

Re:good time to become a loan shark

[Alpha830RulZ]

You're not understanding the history. Let's say a farmer bought land in 1870. Under a rationally functioning market, the price of the land, either for sale or for rent, is a function of the productive capacity of the land. As measured in bushels of wheat, let's say the capacity of the land is 1000 bushels a year, and in 1870 dollars, let's say that was worth $1000 1870 dollars (my price levels are off). The rational rent for the land would be something like $1000 - the cost of producing and harvesting 1000 bushels of wheat. The rational sale price for the land would be some present value of the income stream of $1000 - the cost of producing and harvesting 1000 bushels of wheat over say, 20 years.

Now, imagine 10% annual deflation for 5 years. At the end of the five years, the farmer who bought the land has a mortgage that made sense when the land produced $1000 worth of wheat a year, except that now it only produces $650 dollars worth of wheat. His mortgage payment is the same, but his income, measured in dollars, has declined 35%. He's fucked. He can't make any more money renting the land, because the rental value of the land has declined as well. He can't sell the land for what he paid, because it's value has declined, due to the declining income stream associated with the land.

In your example, you posit that food prices would rise. In isolation, perhaps. You have to consider the overall purchasing activity, however. If your money supply is fixed, which is what a gold standard does, the overall price level, for all goods consumed, becomes a function of the size of the money supply. Food prices can't rise without reducing the purchases of something else, because people simply don't have the currency. So if food prices rise, demand for some other good falls, and that lowers the price of that good. Overall, if the supply of gold is small in relation to a growing economy, prices of goods in relation to gold will never catch up. The only way that the overall price level of a basket of goods can equalize with gold is if the size of the basket declines. That is, the size of the economy has to decline, either through emmigration or mass poverty.

This was a very real experience in the late 1800's, and led to the free silver movement, which desired to monetise silver to increase the money supply.

The lesson monetarists have learned from this is that the money supply needs to be roughly stable in proportion to the size and activity of the economy, or you get distortive effects as people try to not hold either money or property. Slight inflation tends to be more popular with the masses, as it favors those who hold real estate and are paying off loans.

Where this relates to fiat money is that if your central banker doesn't understand what is happening here, it is easy to screw this up by going too far in the other direction, ala the US in the 70's, or any of a dozen banana republic countries we have heard about. Paul Volcker, chairman of the Federal Reserve in the 1980's really understood this, and we all owe him a debt that few understand. People give Reagan accolades for the economic stability we enjoyed from the 80's on. Volcker was the one who is responsible, and Reagan fought him every inch of the way.