Asking the Right Questions About Robinhood/GameStop Meme-Stock Mania – The D&S Blog
By John Suma
Republished from the author’s blog, Dead End Economics.
In The Great Crash: 1929, John Kenneth Galbraith describes one of the defining characteristics of stock market splurges as an obsessive attention to stocks with the euphoric conviction of making easy money on rising stock prices. This recurring obsession which he later describes in his 1987 book, A brief history of financial euphoriaas representative of “recurrent falls into financial dementia” which “have not changed in a truly operational way since the tulipomania of 1636-1637”.
While such thinking is clearly a socially constructed product of capitalist society, sooner or later Galbraith sees individuals and institutions “captured by the wonderful satisfaction of acquiring wealth,” no matter what the past tells us about the madness of such behavior. Given the GameStop mania, with stock prices “going over the moon” before crashing (a pattern followed by over 100 other meme stocks), can we say this qualifies as Galbraithian mania ( although micro)? While clearly a momentary and non-systemic event (i.e., unlike the boom and bust of the subprime mortgage market), GameStop seems to fit into the morphology from Galbraith of speculative mania, investors taking leave of their senses – and thus representing a form of market madness. .
Doug Henwood writes in Jacobin described it as “one of the great bubbles of our time”, adding: “On Tuesday, January 26, more shares in GameStop were traded than in Apple, the largest of them all, with a total market value of 108 times that of the retailer.Like James Mackintosh of the the wall street journal In other words, the price action and trading volume together suggest “widespread disturbance in people’s judgment.”
So much for the market efficiency claims made by mainstream economists and known as the “efficient markets hypothesis”, which tautologically asserts that markets quickly digest and reflect all known information and are by definition always efficient. . That is, markets must be efficient because their participants quickly incorporate known information into prices. The assumptions behind this belief are so ridiculous that it will take another post here to address it. To begin with, it assumes that all market participants have equal access to market information and knowledge and act accordingly with equal competence. Law. To be continued in a future post.
Galbraith’s speculative episodes have common characteristics. He sees every speculative fad, big or small, as fooling investors with something new or different – and those “artifacts” are usually innovations created by Wall Street. Meanwhile, he sees individual (and institutional) amnesia as a way to blind us to past patterns that would instill some common sense.
GameStop’s buying frenzy, then, made possible by a commission-free gamified app (the latest novel Wall Street gimmick) combined with the obsession of social media-fueled investors (largely Gen Z investors trying of playing actions) with little knowledge of the past, making this episode a classic, albeit brief, mania. Call it “stock meme mania” – a viral herd of investors rushing to stocks that have driven the price up.
Many Robinhood retail investors, with an average account size of just $3,500, jumped on the bull band hoping for quick gains. [for more on this tsunami of buying and how it played into the hands of Wall Street insiders, who made billions of dollars from it, see my feature story on Robinhood published by Dollars & Sense in their January/February 2022 issue: “The Lure of ‘Democratizing’ Finance”]. According to Robinhood’s own data, Gen Z and Gen X merchants made up 70% of its customers at the height of GameStop’s debacle in early 2021. In fact, Robinhood claims that the average age of users of its commission-free “gamified” app trading platform is only 31 years old, according to Reuters. This young crowd of traders, new to the world of stocks and options, saw their plunge into the shark-filled waters of Wall Street as unlike previous times – they had the power of social media at their disposal.
As noted by Reuters, “These are young women and men who feel at home in digital communities, whether monitoring discussions on Reddit, following advice on Twitter or exchanging ideas in Slack groups”. Reports that Redditors slapped it on hedge fund pros got a lot of ink in the media, but the SEC found that most of the price spike in GameStop did not correspond to the purchase of hedge funds to reduce losses. It is simply the growing number of stock buyers that has kept prices soaring.
Many probably bought at the top of the bubble, just before the bust. Resembling a pyramid scheme, where first movers usually make money, reports have indicated that many big players on Wall Street were very early on and therefore benefited from frenzied buying by the meme crowd. In fact, many Wall Street insiders also wanted a short squeeze (an old game played on the streets), and so benefited from the social media mob mentality. This dimension was not reported by the mainstream media.
Although the media and politicians always point the finger at market crashes, Galbraith points out that it actually distracts from important questions, such as: is there something fundamentally wrong with capitalism or financialized capitalism? Should individual and institutional speculation on the financial markets be severely restricted or even prohibited? Is there something wrong with economic theory and the way it renders markets (i.e., “markets know best”)?
Although some people may ask these questions, they tend to be the exception. Instead, the focus is on the bad apples of the group (Robinhood), not the apple tree (like the hyper-financialization of the economy, rampant inequality, and neoliberalism) that produces the bad apples. There is never a fundamental questioning of the ideological foundations of markets, an ideology that reproduces our class system through these markets, where a small percentage of financial and business elites reap disproportionately extraordinary gains from maintaining the status quo. This discussion is simply irrelevant.