Welcome to Eureka Street

back to site

ECONOMICS

GameStopping the system

  • 09 February 2021
The controversy over the shares of US video game company GameStop has again exposed what has long been obvious: there is something seriously rotten in the state of the world’s financial markets. It was a battle between a hedge fund, Melvin Capital, which manages $US13 billion, and a small group of ‘amateur’ investors who communicated with each other on a Reddit forum called WallStreetBets.

The hedge fund had bet that the price of GameStop shares would be lower at a specific date in the future, a strategy known as shorting (shorts are a type of derivative, which are derived from a conventional financial asset — in this case, shares). If the share price fell, the hedge fund would profit; if it rose, the hedge fund would lose.

The amateur investors realised what was happening and drove the GameStop share price up sharply, creating massive losses for the hedge fund, forcing it to secure a $US2 billion bailout. Then, to the outrage of the smaller investors and those who, quaintly, still believe there is such a thing as the ‘free market’, the elite’s fix came in. The hedge fund was protected and trading platforms, including Robinhood and Interactive Brokers, refused to allow the amateur investors to buy GameStop shares.

It is another example of the malign nature of the derivatives markets and the illogic of deregulated financial systems. ‘Financial deregulation’ was pushed through, with accompanying propaganda, in the 1980s and 1990s. It was complete nonsense.  Finance, in the first instance, consists of rules and rules cannot be deregulated. As the sociologist Émile Durkheim commented: 'what matters is the presence or the absence of regulatory procedures by which it [money] is controlled'.

Of course the deception had a purpose — to remove government oversight and allow private actors, including hedge funds, to make up their own rules. The result has been persistent financial crises, with those same private actors disgracefully blaming governments for problems they caused. Having removed or reduced government involvement, when it falls apart they blame government. The word ‘hypocrisy’ scarcely seems adequate.

The GameStop circus is yet another example. According to one analyst, for every dollar hedge funds have, they borrow $30-40 because that way they can amplify their profits — or losses. Hedge funds in America have $US3.25 trillion under management, which means that, after that extra borrowing, they can put over $US100 trillion at risk. That is more than enough to bring
Forgot your password?
Subscribe
Join the conversation. Sign up for our free weekly newsletter  Subscribe