Situating the GameStop Phenomenon in the Greater Context of Wealth Inequality
January saw the Reddit forum r/WallStreetBets achieve a momentary triumph over Wall Street itself. Retail investors from the forum purchased heavily shorted (or betted-against) stock, namely that of GameStop, en masse, driving up the video game retailer’s formerly failing share prices. Hedge funds suffered billions in losses, as they were forced to cover their short positions, further adding to momentum that caused the price of GameStop stock to increase over 1,700 percent since January 2021. This series of events revealed moral inconsistency within the business press and was seen by many as a satisfying, although short-lived, instance of karmic revenge against Wall Street. However, it also exposes a sad reality about our broken system, in which many feel that risky gambling on the Robinhood app is the only effective means to cover their medical expenses or support their family during the pandemic. To end the disillusionment and financial insecurity that fueled the GameStop incident, we need Wall Street reform.
The recent development with GameStop was a concerted and intentional effort by r/WallStreetBets dating back to at least four months ago, when a post entitled “Bankrupting Institutional Investors for Dummies, [featuring] GameStop” detailed the plan. As it was carried out, news of hedge fund Melvin Capital losing “53% of its investments in January” was met with celebratory posts on the subreddit. But perhaps those who claimed a decisive victory for Reddit spoke too soon; despite its losses, Melvin Capital will recuperate. In fact, on January 28, real estate publication The Real Deal reported that Melvin Capital founder and CIO Gabe Plotkin is expanding on a $44 million Miami waterfront mansion.
But as GameStop skyrocketed, the business press swiftly and naturally decried the retail investors’ activities as ‘market manipulation’ and as ignoring ‘fundamentals.’ NASDAQ CEO Adena Friedman, Massachusetts Secretary of State Bill Galvin, and journalist Andrew Sorkin appeared on CNBC to comment on the GameStop rally, reminding us that “manipulation is manipulation,” that “there is no reality to these trades,” and that “there are no fundamentals behind what is happening here,” respectively.
However, criticisms that GameStop's share price is dissociated from its fundamentals (since its revenues are, in reality, declining) ring somewhat hollow. We live in an era of corporate bailouts, in which ‘market manipulation’ is essential, and ‘fundamentals’ are deemed irrelevant. Journalist Matt Taibbi points out that:
“America’s banks just had maybe their best year ever…at a time when the rest of the country is dealing with record unemployment, thanks entirely to massive Federal Reserve intervention that turned a crash into a boom. Who thinks the ‘fundamental value’ of most stocks would be this high, absent the Fed’s Atlas-like support in the last year?”
The “Atlas-like support” included a $10 billion bailout for the U.S. oil and gas industry and a loosening of “criteria for oil and gas firms to access [the Fed’s] Main Street Lending Program.” This is despite the fact that oil and gas stock prices had “drastically underperformed the broader market” and “seen declining employment” well before the COVID-19 pandemic. A report by Bailout Watch, PublicCitizen, and Friends of the Earth noted that this government bailout of an already-failing industry (funded in large part “in the form of tax cuts and paycheck support for workers”) “artificially prolonged the industry’s decline and postponed the coming transition to clean energy sources.” There is a curious lack of concern for fundamentals when market manipulation benefits an industry that spent $124.7 million dollars lobbying in 2019.
The retail investors of r/WallStreetBets responsible for the GameStop phenomenon seem to see themselves as agents of karmic retribution against Wall Streeters and the wealthy. One posted: “We didn’t forget - America’s billionaires got $1.1 trillion wealthier during the pandemic…Maybe you’ll finally learn not to f*** with the 99%.”
Another wrote that
“GME is about more than just money, GME is about sending a message…For all the recessions they caused. For all the jobs and homes people have lost. For all the people that can't pay for college because minimum wage has stagnated while wall street gets rich. For all the retail traders they left holding the bag. For all the times they got bailed out with our tax money while we got nothing.”
But to say that this represents the David and Goliath-esque victory against Wall Street that many news networks prematurely painted it to be is somewhat naive. Despite certain significant losses, Wall Streeters found themselves buoyed by billions in emergency cash infusions from fellow hedge funds, trade halts imposed by electronic trading platforms such as the Robinhood app, and instant messaging platform Discord banning the WallStreetBets server. As journalist Edward Ongweso Jr. notes, this moment “is a great reminder that the stock market is a casino—which means you cannot forget that the house always wins." In fact, Ongweso describes how, even the Redditors’ weapon of choice against Wall Street — the Robinhood app — benefits the elite. Robinhood makes most of its profit through a process called payment for order flow (PFOF). In PFOF, when a Robinhood user buys or sells a stock, Robinhood sells the right to that order to a firm (called a market maker) specialized in executing it. In turn, the firm pays Robinhood a rebate, and both Robinhood and the market maker benefit from the relationship. To maximize profits, Robinhood, rather than using the cheapest market makers and thereby minimizing fees for its users, found that it could instead use those offering them the largest rebate; due to a lack of transparency about this practice, Robinhood was fined $60 million in December 2020.
Taking down hedge funds tit for tat, and presumably one at a time, does not represent the systematic change necessary to address the class conflict underlying the GameStop issue. And while the resulting Twitter memes were entertaining, the old adage that ‘laughter is the best medicine’ is a hard pill to swallow when “one-fourth of adults…[said] it [was] difficult to afford their prescription drugs,” even before the pandemic.
One viral post from a retail investor on r/WallStreetBets reads that, thanks to the GameStop rally, “I can now write my mom a check and put my sister through lymes treatment. This has been a very rough year, but I’m so thankful for every single one of you.” Another user wrote, “This year, half my net worth went down the drain to medical bills and making some billionaires sweat has made my sh*tty year just a little better.” These comments reveal the struggle of living in a country that lacks a robust social safety net. Many Americans can only stay afloat amidst a global pandemic, record high unemployment, and staggering wealth inequality by resorting to either crowdsourcing medical costs through platforms like GoFundMe or turning to the Robinhood app in risky attempts to gamble in a rigged casino.
To consider what happened with GameStop and Melvin Capital a substantive victory for the 99% is to mistake catharsis for real change. Bands of revenge-seeking Reddit users giving Wall Street a taste of its own medicine won’t fix wealth inequality. What will, however, is enacting certain progressive Wall Street reforms to materially improve the lives of countless Americans.
Taxing speculation on Wall Street could help fund much-needed social programs. A small Financial Transaction Tax (FTT) on stocks, bonds, derivatives, and other financial transactions is espoused by Nobel Laureate economists Paul Krugman and Joseph Stiglitz. According to a report by the Economic Policy Institute, a “well-designed FTT” could generate from $110 billion to $403 billion in tax revenue. And an FTT is progressive; an Urban-Brookings Tax Policy Center study predicts that “the top 5% of income earners would bear 65% of [an FTT].” Revenue generated from such a tax could in turn fund a more progressive agenda built to redress the economic inequality and injustice that too many Americans face today.