By now everyone has heard about the recent “assault” on Wall Street by legions of day traders. Coordinating purchases over Reddit and using the Robin Hood app, possibly a few million individuals bought large quantities of shares from GameStop as well as other companies like Blackberry, AMC Entertainment, and Nokia, pumping up their prices as much as 300 percent – and much more in the case of GameStop. The surge in their share prices caused hedge funds like Melvin, Point72, and D1 to lose billions of dollars.
It is as an overdue comeuppance for Wall Street. True, those leading the charge on Reddit are probably not players of modest means. But it distracts from the main point, which is that the corporate oligarchy that wields almost all power on Wall Street has been humbled. And more important, the shakiness and irrationality of a market system based on paper assets is increasingly visible.
Some, like Robert Armstrong, writing in this weekend’s Financial Times, hints that such market manipulation should probably not be allowed. But why would shorting the market[1] not be considered market manipulation, while pumping up the same underperforming stocks that others are shorting is? Both activities, it seems, characterize modern-day finance and the growing “casinofication” of markets. But shorting requires lots of capital, and it is therefore something that typically only hedge funds or otherwise well-endowed companies can do.
The small buyers of stocks like GameStop, on the other hand, do not require immense resources. Many of them were buying call options, which are relatively inexpensive contracts that enable stock purchases at a locked-in price. Critics of the Reddit activists appear to believe that stock shorting is ok because the big players do it, but the “price-pumping” through mass share purchases is problematic because it gets in the way of the big players (or worse). I don’t know about you, but to me it seems like complete hypocrisy.
Robin Hood has since blocked or severely restricted trades of certain securities, causing a public uproar. It is quite revealing that both Alexandria Ocasio-Cortez from the progressive wing of the Democratic party and Ted Cruz from the far-right – not to mention Donald Trump, Jr. – have attacked Robin Hood’s move. How can we explain such rare bipartisanship?
It might not make me popular, but I see parallels between attacks on Robin Hood – and by association Wall Street – by both extremes of the political spectrum, and the disenchantment with bland centrist neoliberalism of both the right populist fringe and Bernie Sanders’s army. Both represent today’s complicated politics of little Davids, both on left and right, against the elite corporate Goliath to whom most economic gains over the past three decades have been “trickling up.” It hints at something that we already know: populism comes in both right-wing and left-wing flavors, and the anti-elitism they share almost makes them ipso facto anti-Wall Street. Both factions are increasingly incensed at the manner in which our economy has steadily been transformed into a behemoth casino mostly serving the wealthy and corporate elite.
The GameStop saga epitomizes the gradual but inexorable divergence between economics and finance. Here we have a small company that is hardly economically viable any longer (owing to the now almost universal internet purchases of video games) suddenly realizing enormous financial gains. A complete and utter disconnect. Pure speculation. And we are seeing more such cases in recent years.
I was in the very slim minority who argued, back in 2008-9, that the insolvent banks should be allowed to collapse.[2] It is how capitalism is supposed to work, isn’t it? Ironically enough, Milton Friedman would have been one of the few to agree. He always opposed socialism for the rich, and was one of the few to stridently oppose our government’s bailout of Wall Street after the East Asian debacle in 1997.
Enough double standards. The wealthy have for too long soaked the middle class and the poor. If the latter favor markets, then all in please. If you lose, you lose. The notion that we should ban activist stock purchases is ludicrous and hypocritical. If there is any case to be made for regulation, it is to protect the “small” sucker who is ruined by his or her imprudence. Yet even then, he/she would hardly be the first in line for a bailout. First would have to come the tens of millions of casualties of the naked capitalism we have seen over the past 30 years.
[1]“Shorting” refers to the act of betting large sums against certain companies or securities. In the case of stocks, and investor borrows shares in the market, sells them, and then buys them back in the future to “return” them to the original lender. By “selling high and buying low,” the investor makes a tidy sum if the stock price tanks. But if it unexpectedly rises (as what happened in the referenced case), he or she could lose a fortune.
[2]I don’t have the space to defend my argument here, but please write me if you’d like to discuss.