Meltdown in a Parallel Universe

A bank in the online game, Second Life, apparently experienced a meltdown, not that different from what is happening in the real world — if finance is part of the real world. Here is part of the Wall Street Journal story.

Cyran, Rob and Edward Chancellor. 2007. “A Crisis in Parallel Universe: Real-World Disaster Recipe Hits Internet Game’s Bank.” Wall Street Journal (14 August): p. C 12.

What caused last week’s meltdown of Ginko Financial? It remains unclear whether the bank was felled by declining real-estate prices, tumbling values of stocks it held of virtual companies or a sudden disappearance of liquidity. Thankfully, this particular banking collapse took place in cyberspace.”

“Second Life’s economy, which had a heavy dependence on gambling and real estate, came to resemble that of the U.S. That is, until gambling was recently banned. And a glut of projects gutted the value of real-estate developers and the banks that lent to them. The news that a stock-exchange official embezzled three million Linden dollars further stimulated the market panic.”

“It’s unclear whether Ginko is currently insolvent or just facing a bank run. Nearly half of its deposits were used to buy stocks in virtual companies, several of which subsequently failed. Moreover, the bank was paying depositors more than 40% annually in interest. Eventually investors lost confidence and demanded their money back. With no virtual Federal Reserve to bail out the banking system, Ginko was forced to issue bonds to investors in lieu of cash.”


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