GameStopping the system

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The controversy over the shares of US video game company GameStop has again exposed what has long been obvious: there is something seriously rotten in the state of the world’s financial markets. It was a battle between a hedge fund, Melvin Capital, which manages $US13 billion, and a small group of ‘amateur’ investors who communicated with each other on a Reddit forum called WallStreetBets.

Main image: Wall Street (Unsplash/Aditya Vyas)

The hedge fund had bet that the price of GameStop shares would be lower at a specific date in the future, a strategy known as shorting (shorts are a type of derivative, which are derived from a conventional financial asset — in this case, shares). If the share price fell, the hedge fund would profit; if it rose, the hedge fund would lose.

The amateur investors realised what was happening and drove the GameStop share price up sharply, creating massive losses for the hedge fund, forcing it to secure a $US2 billion bailout. Then, to the outrage of the smaller investors and those who, quaintly, still believe there is such a thing as the ‘free market’, the elite’s fix came in. The hedge fund was protected and trading platforms, including Robinhood and Interactive Brokers, refused to allow the amateur investors to buy GameStop shares.

It is another example of the malign nature of the derivatives markets and the illogic of deregulated financial systems. ‘Financial deregulation’ was pushed through, with accompanying propaganda, in the 1980s and 1990s. It was complete nonsense.  Finance, in the first instance, consists of rules and rules cannot be deregulated. As the sociologist Émile Durkheim commented: 'what matters is the presence or the absence of regulatory procedures by which it [money] is controlled'.

Of course the deception had a purpose — to remove government oversight and allow private actors, including hedge funds, to make up their own rules. The result has been persistent financial crises, with those same private actors disgracefully blaming governments for problems they caused. Having removed or reduced government involvement, when it falls apart they blame government. The word ‘hypocrisy’ scarcely seems adequate.

The GameStop circus is yet another example. According to one analyst, for every dollar hedge funds have, they borrow $30-40 because that way they can amplify their profits — or losses. Hedge funds in America have $US3.25 trillion under management, which means that, after that extra borrowing, they can put over $US100 trillion at risk. That is more than enough to bring the whole system down, as has nearly happened before. The GameStop story is Groundhog Day.

 

'It has often been pointed out that financial markets privatise their profits and socialise their losses. They also privatise regulation — making money out of money in an infinite regress — then socialise regulation when they get in trouble.'

 

The absurd justifications coming from the financial elites actually makes one laugh out loud. The Chief Executive of NASDAQ agreed that the situation was comparable to a national insurrection. Another analyst suggested that foreign powers, perhaps the Russians, might have been involved.

One lawyer said the US Securities and Exchange Commission should investigate the amateur investors — he labelled them 'activists' — because the virtuous hedge funds were holding the stock long term (they were not, they were only holding it for the duration of their bet). And in any case, about two thirds of the turnover of the New York Stock Exchange (NYSE) is high frequency trading happening in micro-seconds. Should that be banned as activism?

The lawyer then complained that the amateur investors were 'manipulative'. Marvellous rubbish. Shorting stock is inherently manipulative. A Massachusetts state regulator even called on the NYSE to suspend GameStop for 30 days saying what was happening is not investing, it is 'gambling'. Derivatives are, in every respect, gambles.

Comedy aside, such nonsense is to be expected in a system that is nonsensical. It has often been pointed out that financial markets privatise their profits and socialise their losses. They also privatise regulation — making money out of money in an infinite regress — then socialise regulation when they get in trouble. Then they compound their wickedness by brazenly blaming the authorities for not doing a good enough job of fixing the mess.

What should be done? The first step should be to expose the nonsense of financial deregulation by showing how all money and financial asset classes, even cryptocurrencies, are, in the first instance, a set of rules. Take out a bank loan, buy shares, buy a bond and trade it, and a myriad of rules will define the transaction. Finance algorithms are only possible because the monetary system is rule based. With derivatives the rules are more informal — disputes are resolved by a panel of lawyers and there is no government involvement — but it is still rule based.

There urgently needs to be a better understanding of the role of authorities and what constitutes sound rule making. Setting strict conditions on, or even banning, short selling and high frequency trading could be a start, but it needs to go far wider than that. It is not overstating the case to say that the future of Western economic life depends on improving governance of the system. Sooner or later, the recklessness of financiers really will bring the whole thing down.

 

 

David JamesDavid James is the managing editor of businessadvantagepng.com. He has a PhD in English literature and is author of the musical comedy The Bard Bites Back, which is about Shakespeare's ghost.

Main image: Wall Street (Unsplash/Aditya Vyas)

 

Topic tags: David James, GameStop, Wall Street, Melvin Capital, WallStreetBets

 

 

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Existing comments

Financial shenanigans: not really my strong point. I always will need lots of help to even balance my money jar. Importantly, here's a quote which may be helpful: "The fact that poetry is not of the slightest economic or political importance, that it has no attachment to any of the powers that control the modern world, may set it free to do the only thing that in this age it can do - to keep some neglected parts of the human experience alive until the weather changes; as in some unforeseeable way it may do." (From Graham Hough - "Modernism" 1991.)
Pam | 09 February 2021


Thanks for the article. Gamesstop has certainly highlighted some of what seem to be lawful but deplorable practices by the big players yet somehow not permitted to be the domain of the average person. Perhaps the regulators have difficulty with the concept that there are a lot of shrewd investors out there and social technologies can facilitate the little guy having a win at the expense of the sacred cows. I can't wait to see how criminal, illegally traded crypto-currency gains which are seeing crooks and drug dealers suddenly becoming "legitimately" wealthy will be handled by international regulations... now that Musk has bought into BitCoin there's bound to be some fancy laundering and a lot of black Teslas with tinted windows on the streets. As a side note, no doubt Crown will be pleased with today's finding and grateful they now don't need to pay for a license they can't currently profit from; when China travel re-opens it'll all be business as usual.
ray | 09 February 2021


Pam (citing Hough): "The fact that poetry is not of the slightest economic or political importance….” Perhaps not. Poets exercise the art of drawing a thousand words into a memorable picture of a few. If Joe Biden knew how to be a poet, he would make of the sense of this article an image that just under 330 million Americans could savour in their heads to subordinate Wall Street to Main Street. With Twitter, Trump had the medium and the notion of Influencer-in-Chief but no message, lacking the picturesque brevity of sense.
roy chen yee | 09 February 2021


Good article. There is an Insiders v Outsiders battle going on. Wall Street created an illusion that it was democratic. Robinhood was supposedly a trading platform for the little bloke, however it sold the data on users’ trades to the big players, like Citadel, to give them tips on where retail investors were sending their money. Other insiders benefited. Treasury Secretary Janet Yellin has been paid $7.2 million in speaking fees since 2019 by numerous corporations, including $810,000 from Citadel. But when the outsiders called the insiders bluff, and the elites’ started losing money, the insiders took swift action. WallStreetBets was banned for “hate speech, glorifying violence, and spreading misinformation”, which was eerily similar to the justification given by Google, Apple and Amazon for de-platforming Facebook competitor Parler, just three weeks earlier. And when over 100,000 uses criticized Robinhood, Google deleted them. Censorship is being weaponized to shut up dissidents. These actions mirror the story in Time Magazine, “The Secret History of the Shadow Campaign That Saved the 2020 Election”, which discloses how the political elite, the very wealthy, the bureaucracy, Big Tech and others struck a bargain to defeat the outsider Trump—to “protect democracy”, of course.
Ross Howard | 10 February 2021


Thanks roy. I like as well to quote William Carlos Williams' more famous lines "it is difficult to get the news from poems yet men die miserably every day for lack of what is found there". Joe Biden has the (formidable) opportunity to bring America back to a joy which has been lacking.
Pam | 10 February 2021


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