Virtual economies have their own Bernankes

NEW YORK -- Just before U.S. financial markets were roiled by a global credit squeeze this summer, an equally dramatic financial crisis threatened "Second Life," the much-hyped online world.

On July 25, the company controlling "Second Life," a computer-simulated online world in which users are free to create whatever life they want, announced that it would no longer allow gambling. Economic activity was cut by nearly half as gambling halls shut down.

That's a recipe for disaster in any economy, with job losses and a possible currency collapse, but the online world stayed on an even keel. That's in part due to the fact that few people make a living there, but also to the firm grip on its currency market by "Second Life's" equivalent of Ben Bernanke, chairman of the Federal Reserve.

That person is John Zdanowski. He's the chief financial officer at Linden Lab, the privately held company that runs the world. Using "Second Life" software, he spoke to The Associated Press as an "avatar," or 3-D representation, in Linden Lab's virtual headquarters.

The gambling shutdown was still a potential problem for economy, because "Second Life" has its own currency. The Linden dollar is convertible to U.S. dollars at an ostensibly floating exchange rate.

Losing even 10 or 20 percent of its real economy set it up for a currency crisis, as gamblers and gambling hall operators tried to cash in their gains for U.S. dollars and put their money to use elsewhere.

"The reason it hasn't hit the exchange rate is that we were exercising one of the controls we have," Zdanowski said.

Noticing that residents' behavior is affected by the direction of the exchange rate, Linden Lab has put a ceiling to the value of its currency. It's done that by selling Linden dollars on the currency exchange for around 270 to the U.S. dollar, and that's where the exchange rate has stayed since then.

Like China, "we basically manage the supply of our currency so that the exchange rate stays fixed against the U.S. dollar," Zdanowski said.