Quick summary: Someone on Reddit noticed that hedge funds had a massive short position on GameStop stock and talked a bunch of other Redditors into buying the stock, thus squeezing the shorters and costing the hedge funds billions. Lots of billions. Like over $23 billion so far this year.
I’m all for the little guys sticking it to the man, but that’s not what I want to focus on in this post. I want to highlight three things: 1) the insanity of financialization, 2) the institutional crackdown against retail investors, and 3) how powerful regular people can be when they organize against existing power structures.
The Insanity of Financialization
From the fantastic book The New Human Rights Movement, by Peter Joseph:
“While the root socioeconomic orientation of capitalism is built around scarcity, competition, and dominance, the financial markets embrace the pure abstraction of capitalism’s primary incentive structure—that being the art of reducing costs and maximizing income. This translates into buying an asset at one price and selling it at a higher price, making a profit. It doesn’t matter what that asset is or even if it exists, just as long as one can reasonably assume it will gain value and can be sold back off, securing profit.
The evolution of this practice is in lockstep with the rise of merchant capitalism. Upon the advent of agriculture and settlement, labor specialization and good markets slowly emerged, along with mediums of exchange or money. A merchant class developed where producers would create goods and their merchants would take them to public market centers and sell them. This division of labor then led to more modern systems of distribution, where the merchants simply bought items in advance, selling them independently at higher prices. At this stage, you can begin to see how the idea of trade for the sake of trade started to take hold as an abstraction. It didn’t matter what the merchants bought and sold, they simply made profit on the act of exchange.
So, what we have is a kind of financial parallel universe. There are real producing companies and resources in one universe and these proxy, avatar-like financial representations of them in the other. … Then we have derivatives, which are financial instruments that “link” to underlying assets created out of thin air once again. These are cartoonish proxy instruments that take anything from stocks, bonds currencies, interest rates, indices, options, commodities, credit, or just about anything two financial parties can agree upon, deriving a new instrument for gambling.
Now, this abstract trading reality is only part of a larger trend termed financialization. Financialization can broadly be defined as a “pattern of accumulation in which profit making occurs increasingly through financial channels rather than through trade and commodity production.”117 Generally, it has to do with the increase in the scope, power, and range of application of the world economy’s financial sector. The financial sector is composed of financial services. These deal with the management and administration of whatever financial activities are in play, usually based around bank loans, stocks, investment services, insurance, and so on.
Financialization is an evolutionary outcome of market capitalism, prevalent in economically mature nations. It appears to be part of an increasingly common developmental path as countries’ true productivity declines, pushing nonproducing mechanisms for income. Now emerging as, indeed, the most profitable industry on the planet, this economic mutation from merchant capitalism into financial capitalism is further expanding the already problematic inequality and oppression-producing tendency inherent to the system. Like the growth of cancer in an organism, the global market economy is becoming increasingly more life-blind and polarized as financialization takes over and abstraction becomes reality.
From the broad view, given trends over the past forty years, it is difficult not to view the growing financial sector as little more than an upper-class money machine that does little for the normal economy. Its growth and profitability has eclipsed other sectors’ growth, even though there is little evidence this disproportionate income has had any benefit for anyone in the world but the investment banks, brokers, and other financial players. In fact, if you compare the profit trends from the manufacturing sector to the financial sector, you will notice they are now inversely related.118 The production of goods is becoming less profitable while immaterial financial services are becoming more so. This is particularly bothersome since the number of people employed in the financial sector has virtually stayed the same, while the amount of profit they extract has skyrocketed.
According to economist Michael Konczal, “Between 1980 and 2006, while [US] GDP increased five times, financial-sector profits increased sixteen times over. While financial and nonfinancial profits grew at roughly the same rate before 1980, between 1980 and 2006 nonfinancial profits grew seven times while financial profits grew [again] sixteen times.”119 In 1950, the US financial sector accounted for about 2 percent of GDP, growing to 9 percent by 2013.120 In the 1980s, profits in this sector were about 10 percent of GDP, while thirty years later they are more than 30 percent.121 Yet, the number of people employed in this US sector has been less than 5 percent since 1950.122 That is a ton of money going to very few people. Again, we are talking about an industry that deals with intangible financial assets and fees, not true production. This radical income growth has been occurring during a time when wages for the rest of the American (and global) economy have been stagnating for decades.123 In fact, research conducted on countries with large financial sectors has found that this trend is actually detrimental to overall economic expansion and prosperity. Admittedly, it is difficult to imagine how the growth of any given sector of a country’s economy could be a negative pressure in general, but that is exactly what has been found.124”
In other words, we live in a crazy world where people who move numbers around on a screen somehow earn vastly more money than people who actually contribute to society by providing real goods and services. This fact alone should make people find the claim that “capitalism is the most efficient system for the allocation of resources” outright laughable. Yet they don’t.
The financial system does not contribute to society, it just legally (and illegally) steals a shitload of value from it.
In the current debacle, clearly the price of GameStop’s stock has absolutely nothing to do with its value as a company. It is completely decoupled. We couldn’t be in this absurd situation if not for the decoupling of the financial system from the real world. The fact that we have collectively been tricked into giving the financial system the outsized and undeserved valuation that it has is insanity and most stop.
Institutional Crackdown
With the ongoing saga of Gamestop shares surging as a result of the r/wallstreetbets subreddit, Robinhood and other trading platforms such as WeBull and Apex Holdings (the clearing firm for among other, Public.com) have refused to allow for the buying of more GameStop GME -44.3% shares. WeBull cited “extreme volatility” and its clearing firm refusing to honor any more clearance. WeBull users were forced now to only liquidate or sell GME as well as a number of other stocks that were adjacent to the same “short squeeze” strategy. Robinhood also cited “extreme volatility” as part of a blog post it put out on the situation.
This latest array of actions follows a bunch of system attempts to stop trading in GameStop shares, or more specifically, to try to stop retail investors from buying more shares, everything from tripping circuit breakers, to now having trading platforms and clearing companies put pressure on shares by restricting trading.
Forbes
In short, popular stock trading platforms recently refused to let retail investors continue to buy GameStop stock to continue the short squeeze. They would only let them sell. The hedge funds were under no such restrictions.
For all market apologists love to go on about the “free market” and the invisible hand, the market is not and has never been free. This event is special in that the market forces that protect the wealthy at the expense of the rest of us were forced to show their hands in a spectacularly visible manner.
It’s not a fair playing field. The people behind the markets are absolutely fine with the wealthy screwing over regular people like in the Housing Bubble that led to the 2008 Global Financial Crisis, but heaven forbid if the little guys ever get one over on the wealthy.
Hopefully this event has made the above reality more clear to more people.
The Power Lies in the People
Finally, I hope that this spectacle wakes more people up to the reality of how much power regular people have. The catch is it takes cooperation. For millenia, economic elites have used division to maintain their asymmetric power over the rest of us. This is why we have no unions in this country anymore, they were busted. But they were busted because those in power were scared of them. The vast majority of the 1% don’t produce anything of value, they’re just really good at taking what others have made. The reality is that they need us, not the other way around. And the thing that scares them more than anything else is us realizing it.
If you think watching a bunch of degenerate gamblers on Reddit take down a hedge fund is fun, wait til you hear about General Strikes and General Tax Strikes 😉