PUMPS AND DUMPS AND CHUMPS
In a more reasonable world, hardly anyone would care about the ups and downs of a smallish retailer’s stock price. Even near the top of its Reddit-fueled roller coaster, GameStop accounted for only about 0.06% of the total value of U.S. stocks. Furthermore, the stock market itself is mainly a sideshow to the real economy.
But we don’t live in a reasonable world, we live in a world where the GameStop story briefly commanded global attention. And the craziness did offer some important lessons — not so much about economics and markets as about psychology and politics.
For it turns out that despite four years of Donald Trump, our society remains remarkably gullible. And it is not just members of the public who believe what they see on social media; far too many influential people still keep falling for fake populism.
The story so far: GameStop is a chain of stores selling video games and other electronic goods. With the rise of online gaming, the company’s underlying business has been in gradual decline. Recently some hedge funds, which believed that this decline wasn’t fully reflected in its stock price, began selling the stock short — that is, borrowing stocks and selling them, expecting to buy the stocks back at lower prices.
Enter Reddit, an online discussion site. WallStreetBets, a “subreddit” (discussion board) that caters to small, risk-taking investors, has become a force in the market: Stocks promoted on the board, so-called meme stocks, sometimes soar. And that’s what happened to GameStop.
In fact, GameStop surged so much that the short-sellers were forced to fold their cards. The rising stock price meant that they were losing money, and to limit their losses they had to unwind their positions — which meant buying the stock back, which sent its price even higher.
GameStop’s stock price has come mostly, although not entirely, back down to earth. And now, instead of reading about little guys who suddenly became rich, we’re reading about small investors who bought near the top and lost their life savings.
So what was all that about? Social media acted as an accelerant, but the basic story of what happened is a very old one. This was basically a pump and dump, with a side order of predatory trading.
A pump and dump takes place when an investor or group of investors buy a stock cheaply, then drive its price up by spreading rumors and/or misinformation, letting them unload their shares on naïve chumps — “bag holders” — at a profit.
Still, the stock did in fact get pumped — we don’t know who exactly pushed GameStop, but many WallStreetBets posts are reportedly coming from bots, not actual human beings — and somebody made a lot of money selling it to bag holders.
All in all, it’s a nasty story with no obvious good guys. Who’s going to shed tears for short-sellers? But it’s also, in financial terms, small potatoes. What’s distressing about the GameStop saga isn’t the fact that some people lost money; it is, as I said, the continuing gullibility these events exposed.
Let’s be clear: What just happened was not a populist uprising. Our economy has left many families behind, but what working Americans need is an end to wage stagnation, not the opportunity to gamble on stocks.
So let me make a plea to everyone who cares about the inequalities of our society: It’s fine to support populism, but make sure that the populism is real. We need serious policies to make American lives better, not conspiracy theorizing and phony culture wars against “elites.”