Markets: The GameStop hangover
Despite what you may have heard, said Paul Krugman in The New York Times, the GameStop saga was “not a populist uprising.” As the dust settles on the stock’s spectacular rise and swift fall, we’re no longer “reading about little guys who suddenly became rich.” We’re reading about little guys “who bought near the top and lost their life savings.” Social media acted as an accelerant for a “very old kind” of Wall Street story, a “pump and dump,” in which some investors drive up the price of a stock by “spreading rumors and/or misinformation, letting them unload their shares on naïve chumps—bag holders—at a profit.” A few people on Reddit made money promoting the “narrative of little guys taking on The System.” But of course Wall Street did, too, as hedge funds saw a profit to be made and got in on the action, with one financial firm, Senvest Management, reaping $700 million in a few days.
Whoever was the winner here, “the stock market has failed at its most important function,” said Felix Salmon in Axios.com.
It’s supposed to be driving investment “to the places where it can do the most good.” Obviously, that’s not what happened in this speculative mania. Treasury Secretary Janet Yellen brought together top regulators last week to figure out “what might be done to prevent a spectacle like GameStop from happening again.”
The House and Senate are also both planning hearings. Financial companies have long argued that high-volume markets create efficiencies and benefits for all. The frantic trading in GameStop proved that’s not always true, increasing political momentum for a financial transaction tax—possibly
0.1 percent on every stock market trade—to discourage high-frequency trading. Longtime critics of the finance industry have seized on the fiasco. “Investors, big and small, are treating the stock market like a casino,” Sen. Elizabeth Warren (D-Mass.) wrote to regulators.
“The showdown between hedge funds and retail investors on Reddit is getting a lot of attention in Washington,” said Nir Kaissar in Bloomberg.com. And it has indeed been a wild ride for GameStop and a few other stocks. But the clamor for new regulation “risks rolling back the progress made to democratize markets in recent years.” What investors might most need protection from is the idea that investing is exciting and they should have fun riding the surge, said Michelle Singletary in The Washington Post. Recent headlines make stock trading seem like “a chance for anyone and everyone to make fast money.” But for most people, most of the time, “slow and steady is a winning strategy.” People who become extraordinarily wealthy usually set objectives and stay patient “regardless of whether the stock market is up or down.” If that sounds unenticing, that’s a good thing. “Investing should be boring.”