The Second economic crisis

In early January 2008, many virtual banks in Second Life, some which offered as much as 200% and 300% annual interest rates, collapsed

If outgoing US treasury secretary Hank Paulson’s skeletal visage and your stock portfolio statements aren’t enough to convince you that the global economy is in peril, then a trip to Second Life might help convince you.

Second Life is an elaborate virtual online world run by US-based Linden Labs. Users of Second Life, called Residents, use a free desktop application to create online avatars and then interact with others. Residents can not only socialize, but also buy and sell virtual land and trade in virtual products and services. There is even a virtual currency, Linden dollars, that is convertible to real-world money on currency exchanges.

Second Life, then, started out as the ultimate libertarian project. Residents were free to run any business they wanted to without being hindered by the rules, regulations and oversight that made real-world business and economics boring and complicated. Little wonder then that according to some estimates, in 2007, Second Life may have achieved a gross domestic product of close to half a billion dollars (real dollars, of course.)

Enterprising Second Lifers became virtual Linden dollar millionaires with vast swathes of digital land in their control and thriving businesses in property, clothing and even furniture. So trendy had the service become that hundreds of universities opened virtual branches and, starting with the Maldives, some countries even ran virtual embassies.

Unfortunately, the Second Life economy was not as decoupled as residents may have thought. In early January 2008, many virtual banks in Second Life, some which offered as much as 200% and 300% annual interest rates, collapsed. Users made runs on several banks till accounts had to be frozen. Bankers, residents found too late, were unable to live up to their payout promises.

And now, in an uncanny reflection of real-world turmoil, The Sydney Morning Herald reports that land prices on Second Life may have crashed by as much as 90%.

While it seems unlikely that these property dealers will find a second life in Paulson’s Troubled Assets Relief Programme, the crisis in the virtual world only strengthens our faith in a suddenly fashionable old adage: If a money-making scheme, real or virtual, seems too good to be true, it probably is.

Source: livemint.com