Backdoor into Heaven

Recently, IntLibber Brautigan posted a system announcement on his Ancapistan Capital Exchange website proclaiming a backdoor loophole by which investment activity from his BNT Financial Bank can continue. He evoked the Middle Ages principle of Contractum Trinius, which in short allows for a three-stage method of bypassing the banking ban.

Looking at it from a purely technical sense, it would likely work. After all, Linden Lab did actually state what they were banning from a pure technical stance. They are simply not allowing monetary transactions to take place that pass through scripted objects (i.e. and ATM) that guarantee a return of investment.

When we look that this terminology, then it is rather easy to bypass. A bank doesn't have to have an ATM where depositors have to travel to. Indeed, LSL makes it possible for withdrawals initiated by a website to send funds to an avatar. Ginko Financial allowed that all the time, so I didn't need to leave my seat at the blackjack table to gather extra funds. Still though, I suspect that an object did perform the actual transaction.

Based on my knowledge of ATMs, they are needed so that website and database information on who is actually making the deposit be recorded. Otherwise we could simply send the funds to the proper avatar. This would protract the process of assigning monies to a given account, but otherwise it skirts around the use of ATMs in-world.

However, the question remains: What is the stated purpose behind the banking ban? Certainly it's not about ATMs. Fortunately, Linden Lab has provided that reasoning, which is to protect residents from those that would take advantage of us. Bypassing ATMs might slow that down in one way, but speed it up in others.

It's the spirit of the ban that is of issue. While the Contractum Trinius worked mainly because the loophole was based on sanctioned activities, Linden Lab has not in place any such guarantees. It's not papel decree that we have to worry about, but rather the law of the gods themselves.

At least BNTF has a more legitimate avenue for survival in that they are already an RL bank, which they proudly display at ACE headquarters. I do wish them luck in their SL endeavors, but if they push for the sneaky route, I fear that it may backfire. Unfortunately for us, such a backfire may very well take place in a room full of petrol.

Looking from the Outside In

One of the things that occasionally run in my mind is the question of who actually profited from the Great Depression of the 1930's? After all, it's not like wealth somehow just disappeared. Money, yes, but wealth is a different issue.

Part of the issue for the Stock Market crash of 1929 was excessive speculation. Stock prices just soared to record highs based on some assumption that the market could do no wrong. Then there was the economic equivalent of a sneeze that knocked down the house of cards that was built on Wall Street, and suddenly the economy went to pot.

Obviously the ones that managed to make well out of the stock market were the ones that sold at the high speculative levels then didn't return their gains until afterwards. In my mind, that fair. From a certainly point of view, trading shares on the market is much like a grand game of poker, where one tries to guess who is bluffing on value. The ones that convince others that a security is worth more or less than what it is worth do better.

But what if there are some that have an unfair advantage? In the parlance of the 1980's, it's called insider trading. As a society that attempts to inject a sense of morality into capitalism (which is neither moral nor immoral, but rather amoral), we tend to throw the proverbial book at them, and since gains almost always come at someone else's loss, this is not a bad thing for society to adopt.

Now when we look at Second Life, it is interesting to ask the same question: who is profiting off of the bank ban? If we try to look at it from the stance of naiveness, then it will be the banks themselves that are profiting. After all, they no longer have to pay interest and can blame Linden Lab for their stinginess!

Alas, customers are not stupid. (Well, most of them aren't.) They know that if a bank is no longer paying interest, it is not in their best interest for their deposits to remain in the hands of another avatar. Hence we see the phenomenon of the "bank run". This was of course what was happening in the early days of the Great Depression as banks were indeed collapsing, and some were collapsing due to the loss of operating capital. In other words, those that got out early were the ones that prospered.

But what can a financial institution do to prevent a bank run? For the stock exchanges that have not been paying interest, it should be a non-issue as they proclaim they have the funds on hand. I certainly hope this is the case, and I believe that it is. Of course some stock exchanges are connected to banks that do generate interest (which is not unusual even in RL), and some are going through the crunch of liquidating holdings in order to match deposits on record.

Ah, but there is one that is not seeing this problem. The World Stock Exchange, which is connected to an institution call One Bank, is simply closed, with their ATMs non-functional. In a general sense this isn't a surprise; other banks have at least discarded their ATM withdrawals or put low limits on them. However, what make WSE's case interesting is that they closed before the bank ban was announced!

It could be pure coincidence, but others have noted the timing of WSE's closing with Linden Lab's announcement and are highly suspicious. I personally do not like to make judgements without solid and incontrovertible evidence, but I too have to be a bit on the suspicious side.

If it is simply a coincidence, then it would be useful to have suspicions allayed. After all, rumours are the hallmark of panics in the economic realm. However, if there is something afoul, then I hope that it is exposed for what it is. Only then can we in the SL community be doing what Linden Lab is looking to impose. Voting by feet is the way economic democracy works, and it would be worthwhile to discern who does not deserve our votes.

The Land of the Free?

I've been making comments on SL Reports and a few blogs that deal with the Second Life economy, stating my opinions on what I see as the end of the free market. That is something of a hyperbole to be sure as there will seem to be no restriction on buying megaprims from someone even though they are freely available.

To explain what I mean about the end of a free SL market, it might be useful to compare it with the rise of the middle class in the late Middle Ages. During much of the time after the collapse of the Roman Empire, feudal manors tended to be self-sustaining entities. There was no need for trade or the like as the serfs did all the work needed for continued prosperity of the fief lord. Simply put, those who controlled the land didn't need to advance society.

When guilds were being created in the towns of Northern Europe, there came into being the beginnings of what we call the middle class. Not at the same economic prosperity as a feudal land-owner, but certainly more freedom than most serfs. In order to advance themselves against the reactionary aristocratic system, they had to develop means of managing wealth. For them, wealth was the result of labour put into their respective crafts instead of land holding.

So far, so good. Obviously in Second Life there will continue the presence of designers, animators, scripters, and builders. There is no reasonable objection to what most of them do, so in that sense the free market will exist. However, to what I am referencing is the innovation for the management of wealth by this pool of talent.

A way to look at it is that most businesses that have high survival rates are those that do more than simply operate their craft. Many of them have to have the resources to conduct their skills and be successful at it. Communities of individuals working together toward a common objective are far more likely to prosper than those working alone. This gestalt is the kernel of what a corporation is, or at least a partnership.

In a lot of cases, such communities require an investment into what activity they are performing. It could be as simple as a sponsor, but that is just an alternate form of the feudal model. For communities to have the independence to operate their skills, investment needs to have a broader base of support.

Of course no one is stopping people from giving out loans to another individual, but the basic human tendency is to have some expectation of a return. I might give or loan money to a family member or a close friend, but I'd be daft to entrust it to someone else without some incentive, meaning dividend. And yet when stretched to a logical extreme, this is precisely what LL's policy does.

When I make a deposit in a bank, I'm not simply letting them hold onto my funds while I go off somewhere else. In Second Life, I can simply hold onto it where it is safer. (Talk about a reversal of what is the safest location.) Instead, I am loaning my money to a financial entity which then invests elsewhere. That is why funds get depleted when there is a high volume of withdrawals in a short time-frame. As a gesture of the trust that I am engendering, I am compensated for my loan with a return on it in the form of interest.

Yes, some of these places will simply take that money and run, but that's also a risk that they take when they invest themselves. A borrower might simply not log in again, leaving a bank out of luck. With the high risk comes the high rate of interest, otherwise it would be insufficient in a cost-benefit analysis.

Banking is a two-way street. A depositor becomes the lender, and the reverse hold true when loans are made or some other service offered. The middle class of centuries ago understood this, and despite usury prohibitions, they worked around it to spawn a new level of how a market works. A free market would allow people to make that decision on their own, even if there is some level of regulation. An outright prohibition stomps that out.

No longer will an ambitious businessperson be able to ask other people for the chance to expand beyond what they can do alone. Only those with the wealth to begin with will be able to operate in that capacity, while potential investors will no longer be able to share in that journey. It's not just an aristocracy and peasantry type of system. Free markets are not the domain of peasants.

Barbarians at the Gate

The shoe dropped from the other foot today as I learnt that Maelstrom Blaphomet, CEO of Dragon Global Diversifed, has decided to close up shop and liquidate the fund's assests. I am in no way surprised by this news as I am fully aware of just how much DGD's growth depended on interest-bearing deposits. (It has been my predominant investment.) With those gone, along with the distinct possibility that dividend-paying companies might be required to fold or change models, Mael's decision is rather sensible.

I managed to chat with him for a while as he was going between different financial institutions trying to withdraw Linden dollars that belong to the fund. As I've come to know, Mael plays very conservatively in the greater sense. The liquidation of DGD will result in a final dividend that's greater than the IPO price, and already much of that is held by an alt as a reserve measure. His conservative stance goes along with a justifiable pessimism regarding the future financial state of Second Life. I happen to agree with him in terms of a very real possibility.

On the other hand, at least three stock exchange heads are expressing optimism, indicating that the policy will have no or very little effect on their operations. I believe that to be technically correct, for they are or will soon be declining to pay interest. Ah, but what of dividends? They are public companies themselves with shareholders. Plus they host companies that pay dividends apart from the exchange. Is that in the same class as interest?

The most likely answer is yes. If Linden Lab is applying a sledge hammer to banks, it has to hit the listed companies as well as it would be all too easy to intermix the distinctions. An example would be JT Financial's Investment Certificates listed on SL Capex. They are effectively tradeable bonds just as any company's shares and pay a monthly dividend that they refer to as interest. How can LL parse the difference if banks suddenly started to act as credit unions instead? Within the spirit of the new policy, there is no difference.

What I fear is happening is the rapid collapse of capital-based economics within Second Life. Apparently LL will allow groups to operate as businesses, but that is limited to equal partnerships which a market-type system cannot accomodate. As the dominos fall, either CEOs will display honour and reimburse shareholders as much as possible (which Mael is taking the lead on) or simply run away with whatever assests they can. In the former case, which I believe to apply to most CEOs on all exchanges, this will mean estates will be liquidated in many cases as that is the only true asset.

When going through historical comparisons of other economic collapses, it's easy to invoke the stock market collapse of 1929 and the subsequent depression. However, I think that too mild as while many firms did fail, many others managed to stay in operation. Furthermore, the government did not cause the collapse, although failure to regulate certain aspects did fail to prevent it.

No, I believe the apt parallel would be 5th century Rome. Unlike the Great Depression where things were just simply not as well off as before, the fall of the Western Roman Empire led to a near total collapse of civilisation itself. The central government's failure to maintain the infrastructure of the provinces (which Rome relied on for necessities) led to the loss of even basic functions such as food storage and water supply.

The SL grid will not be collapsing because of this, but it's as if the barbarians are at the gate, rushing in to ransack what residents have built up over the last few months. Unfortunately, it seems that the barbarians are the gods themselves.

First Entry on the Collapse of the SL Economy

I've had this particular account for a while, but I usually am on other blogging sites, focusing on things outside of Second Life. I do sometimes reference my SL experiences there. However, the recent change in Linden Lab's policy toward financial institutions has made me think a lot of what is going on, so I feel that I need to address it in its own space. Thus, here I am. :-)

For starters, I'll look at the slippery slope that this decision can generate. Taking a look at the FAQ for the policy on the support page, I note that the intent of the banking ban is to prevent residents from scams and defaults. It sounds like a noble idea, but according to their blog release, this came after numerous complaints regarding the collapse of Ginko, Allenvest, and Midas Bank, plus the whole issue of Jasper Tizzy's departure. If the noble thought was there, why did it wait until now? This has been several months in the making.

Financial institutions in Second Life have been called nearly every name in the book. It is probably for this reason that many of the comments on the blog entry are in favour of Linden Lab's decision. However, what ever happened to the issue of rationale? Is there a single reason for these collapses?

Absolutely not. Ginko collapsed because of panic withdrawals that took place after the gambling ban. When depositors became unable to withdraw from their accounts, many of them cried foul. Of course Ginko was going to run out of their reserves when a huge segment of the SL economy became prohibited. This isn't saying that Ginko was a mere victim; their contingency plans were rather inadequate to say the least, but they didn't do it all to themselves.

Allenvest is even easier to see, and that is entirely Allen's error. When the move of SL Capex from his bank to JT Financial occurred, of course the exchange customers wanted their funds to go with them. Oops! Didn't plan for that, I suppose. Allen place blame on Ginko in terms of cutting short a long-term deposit, which Ginko denied. If only it were possible to see the transaction log for when the supposed withdraw took place. Regardless, Allenvest's collapse was poor execution of the AVIX sale. (That Allen is also some other avatars of low regard it not truly relevant here.)

With Midas Bank, I just heard a lot of second and third-hand knowledge. However, surely it couldn't have been because of Hope Capital's default on bond interest. That's what the Sell order is for. Yes, it would have hurt some in the long run, but otherwise they would like still be in operation if that were the only cause. I don't think that WSE is blameless, but it was more of a coup de grace than the actual firing squad.

In none of these cases can a scam be absolutely determined. A legitimate cause can be found in at least the first two. This is not to say that there are no scams, but it's dangerous to lump all banks under the same umbrella. Unfortunately, that is exactly what happened.