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

from the get-real,-people dept

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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