Global Stock Market

GameStop squeeze and Robinhood saga show Wall Street’s out of touch

  • Paul Constant is a writer at Civic Ventures and a frequent cohost of the “Pitchfork Economics” podcast with Nick Hanauer and David Goldstein.
  • In the latest episode, they spoke with California congressman Ro Khanna about Robinhood and the GameStop squeeze.
  • Khanna says the stock-buying craze should serve as a stark reminder of “the over-financialization of our economy.” 
  • See more stories on Insider’s business page.

It feels like a fever dream now, but for one week in late January all anyone in the media could talk about was Gamestop’s skyrocketing stock prices. 

In case you’ve already driven the episode out of your memory, here’s a brief recap: A Wall Street hedge fund had placed a big bet that America’s biggest chain video game retailer was on the verge of failure, and users from a subreddit called WallStreetBets rushed in to buy stock and force the hedge fund to cover their positions, thereby costing the fund billions of dollars in the process and driving the stock price up in what’s called a “squeeze.” 

After GameStop share prices started climbing,

stock trading apps
that many Redditors used to buy stocks, including Robinhood, suddenly disabled the capacity of users to buy additional shares of GameStop and other so-called “meme stocks” for on-the-skids companies like AMC and BlackBerry that had gained new prestige thanks to WallStreetBets.  

Before Robinhood throttled the stock-buying craze, the internet was full of pundits claiming that the little guy was finally striking back against Wall Street, that the age of hedge funds had come to an end, and that a new economic order was dawning. But now that GameStop’s share price has declined considerably (though it remains quite erratic,) those hot takes all seem like empty hyperbole. Hedge funds made fistfuls of money off the GameStop stock fad, and the stock-trading revolution didn’t materialize. The rich got richer — and everyone else, by and large, either lost money or coasted along.

In this week’s episode of “Pitchfork Economics,” Nick Hanauer and David Goldstein talk with Representative Ro Khanna, who represents California’s Silicon Valley, to discuss the true lessons of GameStop mania.

Robinhood’s motives

Khanna has some harsh words for Robinhood’s decision to disable its users capability to buy certain meme stocks without any explanation. “Even if you don’t think there’s any nefarious motive — my sense is it was a

liquidity
issue and they didn’t have the money required to meet the clearinghouse collateral requirements — you wonder why they didn’t have to have disclosure,” Khanna said. 

“They had no disclosure to their investors. They took no provisions to have loans or other capital available if they ever ran into that situation,” Khanna continued, adding that Robinhood also was selling customer data to a market maker called Citadel Securities, which then likely profited from the use of that information. 

“It does create questions about whether these conflicts of interest should really exist,” Khanna said, “and whether people should be allowed to trade on your data when you have a relationship with someone who has a different financial interest than the investors trading on the site.”

Robinhood, then, seems to be built on two separate models of exploitation. Not only does it serve as a low-friction entry point to the rigged casino of Wall Street, where the house always wins and the little day trader always loses, but it also apparently has the privacy issues of a Facebook or a Tiktok, in which users may not realize that their every move is being scrutinized, packaged, and sold to the highest bidder. Both types of exploitation have thrived under decades of deregulation, and they’re likely to only get worse without some form of government intervention.

On a broader scale, Khanna calls the GameStop craze a potent reminder “of the over-financialization of our economy.” 

Some 55% of Americans aren’t invested in the stock market at all, “The fact that so much attention is being paid to this gambling as opposed to investing in building things — battery storage plants or electric vehicle plants — should make us pause about what’s going on in our economic system and why,” Khanna said.

Wall Street’s disconnect

The past year, in which the stock market climbed ever higher throughout the pandemic, even while more and more Americans lost their jobs and financial stability, offers even more proof that Wall Street has become unmoored from the average American’s experience. 

Financial success has less and less to do with the creation of solutions to everyday problems and more and more to do with stripping value and leveraging profits away from existing assets. To flip Mitt Romney’s 2012 leaked fundraiser speech on its head, rather than making products and services with real-world value, finance has become about taking assets away from the average American.

Or, as Hanauer asked late in the episode, “Why in the world would you want to make it more lucrative for a highly talented person to rub money together to make more money, rather than go crack some medical problem, or invent some gizmo that could actually increase human welfare?” 

It’s a fundamental economic question, and one that will only become more pressing as hedge funds and tech startups continue to run amok. Is the point of capitalism for a select few to make as much money as possible, no matter who gets hurt in the process? Or should the forces of capitalism be directed through regulation toward building concrete benefits for all society?

The next time these two dueling economic philosophies come into conflict, much more than a chain retailer’s flagging stock price might be at stake. 

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