The last few days have seen a roaring finance war erupt between short-selling hedge funds and institutional investors on one side, and a rough amalgam of online day traders and iconoclastic businessmen on the other. To simplify, hedge funds made short bets against Gamestop, a struggling video game retailer. Day trade hobbyists on Reddit and elsewhere found out about it, and decided as part money-making scheme and part political statement, to buy Gamestop stock and drive the price through the roof, causing exponentially devastating losses to the short-selling hedge funds. Accusations of gamesmanship, manipulation and insider trading have been lobbied on both sides. Day traders were blocked temporarily from buying more shares on popular platforms, institutional investors accused day traders of malfeasance, and there are demands for regulation across the board.
The finance policy and specific regulatory questions are interesting, but there is a crucial macro conversation happening over “fundamental value” that needs more attention. It sheds light on a deeper argument that has been ongoing since the Great Recession and the Occupy movement: who gets to decide what fundamental value is?
The broader establishment position tends to agree with institutional investors that the day traders driving flailing Gamestop stock to blue chip prices are somehow affecting the fundamental laws of nature and market forces; that they are putting casual investors at risk of a collapsing bubble; that they are creating noise in an otherwise efficient market.
But many leftists and anti-establishment writers rightly point out that the entire market is built on socially constructed rules and assumptions that make the very notion of a “free” market or “fundamental value” risible beyond the mutually decided social utility of companies and markets. At a bird’s eye level, the very existence of a corporation is an artificial construct of law. The corporate veil that protects individual actors in companies from civil and even criminal accountability is a distortion. The choice to tax investments at lower rates than working income is a distortion, as is the decision to give massive tax breaks to homeowners rather than renters. The decision to allow pharmaceutical and beverage companies to make enormous profits on opioids and beer, but not to allow other forms of commerce in addictive substances, is a socially constructed choice. And so on.
At a more specific policy level, low interest rates, quantitative easing and providing easy money to financial services companies is broadly beneficial from a Keynesian perspective. Preventing those companies from failing (even as a consequence of their own poor decisions, as in the financial crisis) is probably the lesser of two evils–though many on the left would rightly argue that those companies should either be nationalized or tightly regulated if their losses must be socialized. But it also does allow financial services a great deal of latitude to “succeed” in what functionally amounts to a rigged game. These policies, combined with a loose regulatory structure, light enforcement and almost nonexistent auditing, make it almost impossible for these companies to lose. The excess cash in the financial sector, meanwhile, not only increases liquidity throughout the economy but also allows for a wide array of predatory risk taking that hurts workers and damages stability and employment in the real economy.
These firms are not successful because they’re smarter and more capable than others. Most of them would have been bankrupt multiple times over without assistance from the Federal Reserve, implicitly backed by the taxpayer. They have become semi-governmental entities with a revolving door between government and private sector, guaranteed against failure.
Within a modern capitalist system that is probably good macroeconomic policy (though again, many on the left would want much tighter regulation or government ownership in return.) But crucially, that leeway has not been given to brick-and-mortar firms. Your local chain store–to say nothing of your local mom-and-pop corner store–has not been provided the same assurances against failure or the same easy money. They are told to succeed or fail in the cold waters of a rapidly changing “free” market filled with metaphorical sharks. Yes, Keynesian liquidity to the financial sector has spillover benefits across the economy. But it also gives predatory hedge funds enormous leeway to stake out short positions on struggling firms, devaluing them and then selling off the remains for pieces. This has happened again and again, with private equity and hedge funds obliterating companies that might have survived for a long time otherwise, such as Toys R Us.
So when a bunch of chaotic Redditors bid up the price of Gamestop shares from $6 to $350, is that a distortion of the market from fundamental value? By traditional metrics that assume the stock market impartially assesses “value,” certainly. But from another perspective, intrinsic value isn’t for hedge funds and big institutional investors to decide. Without public support, most of the financial sector itself would be bankrupt. And in any case, there is no such thing as “intrinsic value” that doesn’t factor in the choices of society about how markets should be run, what rules govern corporations, what tax incentives exist, etc. It’s far more artificial construct than product of natural law.
The system as it exists depends on too-big-to-fail-finance companies. Modern public policy doesn’t work without them, but they’re given rein to predate on real brick-and-mortar firms. No matter how many revolving doors may exist between Goldman Sachs, the Fed and the White House, Goldman Sachs is not a government entity. They’re simply a group of self-interested actors that have taken on the trappings of a semi-governmental entity. But they have greater real legitimacy as economic actors than a loosely affiliated group of day traders on Reddit. And, in fact, the finsec companies owe their health and existence to the taxpayer.
It’s also important to remember that economics is a human activity. And the human angle is crucial here. Hedge funds are not community members, except perhaps in downtown Manhattan. They cater mainly to wealthy investors. Companies like Gamestop, Toys R Us and AMC, by contrast, are present in communities. They pay local commercial rents, they employ local people, they pay local taxes, and local customers can go there to purchase things they want.
So if a loose assembly of day traders decide that Gamestop or AMC is more valuable than Delta Airlines, then perhaps it is more valuable than Delta Airlines. But even if one denies that proposition, it’s certainly true that if enough investors believe that destroying a hedge fund for social or political reasons is more valuable to them than the money they potentially lose by pouring money into a bubble, then that is also a valid assessment of value in a theoretically free market. After all, there’s a strong argument that hedge funds should not be allowed to exist. If individuals want to literally burn their own money in a flaming bubble just to see a predatory hedge fund go out of business, why not? If the taxpayer gets to prop up Citibank, why shouldn’t individual actors get to prop up Gamestop?
Institutional investors don’t have the right to decide who lives and who dies in the economy while they profit either way. And if individual traders are going to be prevented from distorting the “intrinsic value” of companies, then perhaps we should be taking a sharper look across our economy at what economic activity we decide has intrinsic value, and what economic activity does not.