Home > Uncategorized > Game stop 2: What are stock markets for?

Game stop 2: What are stock markets for?

from Peter Radford

The sudden attention being given to the gyrations of Game Stop stock prices has caused all sorts of hand wringing within the hallowed walls of high finance.  In typical fashion the people who like to carry on their trading and associated activities beyond the public gaze are all a twitter because a bunch of apparently crazy outsiders are not adhering to the sedate rules of the game.  This produces truly odd results.  Normally virulently anti-government voices are suddenly calling for SEC investigations and even regulation to prevent outsiders spoiling things.  Some are swooning over the event as a demonstration of the awful greed and selfishness that has overtaken even average Americans — rather than just Wall Street denizens.

How dare average people become as greedy as Wall Street bankers!  The horror of it all.  Whatever next?

Then, naturally, there are the libertarians who use the chaos as a reason to argue against any further government intervention in the economy.  In their view the entire disruption is a result of people having too much money to play with.  Which must be the government’s fault.  So the answer, obviously, is to make sure that only a few people people have too much money to play with.  That the select few who have spare cash happen to be the clients of Wall Street banks and other houses of high financial wisdom is not something we peons should concern ourselves with.  For goodness sake, can’t the regular people just stick with their little 401K retirement plans and be satisfied?  Leave the fun of gambling and money making to the grown ups.

More seriously, the current episode helps explode the mystique of the stock market and Wall Street more generally.

We all spend far too much time worrying about, looking at, talking about, and generally concerned over stock prices.  The stock market is not a source of capital for business, so stock prices are not a signal of the level of investment in the economy.  Entrepreneurs who establish new businesses do not get cash from the stock market they get it from bank loans, venture capital investors, and government grants.  And most do not cash out by selling into the stock market — despite the high profile IPOs the media drools over.  They cash out by selling their businesses to a larger, more established business, either for cash or stock in that larger business.

What about so-called price discovery?  That’s usually the last bastion of stock market defenders.  All the huffing and puffing in the market is said to clarify or create a more objective perspective of the value within certain business activities.  So when we see higher prices, we are told, we are learning that a consensus, or positive outlook, has emerged around the activity being priced more highly.  Sure.  That must be why bank stocks were well priced before the financial crash of 2008?  More to the point: what, precisely, is being discovered in the run-up in Game Stop’s stock price?  Are we to believe that, quite suddenly, a company who’s future still looks bleak has discovered some magic sauce that will generate sufficient future income to deserve such a high price?  Really?  And just how professional and insightful was all that analysis allowing bank stocks to be priced the way they were prior to the big crash?

Then, of course, there’s the argument that stock prices are indicative of a notion of future economic activity.  This is why prices have stayed high throughout the pandemic induced recession.  There’s going to be a big boom once herd immunity kicks in and the COVID crisis dies away!  This, in more common language, is called speculation.  There is some underlying logic to it.  But that logic can easily mislead — as it has in numerous bubbles throughout history.  How can we tell whether prices reflect cold hard analysis or are the result of mania?  Game Stop. Q.E.D.

More likely, the stock market reflects the collective wisdom of the wealthy elite as to where it thinks its future rents can be extracted.  We are simply observing a giant private conversation in which financiers, oligarchs, and the wealthy debate the source of their future income.  Around 80% of all stocks are held by the top 10% of society.  The distribution of the rest means that the average person ought have no interest at all in the stock market.  The idea that this private conversation has valuable information in it for the broader public, or that it can provide a guide to where to invest our collective resources, is absurd.  It is not useful at all in those ways.  It isn’t relevant.  It is, let me repeat, simply an indication of where a very narrow group of people think they can make money.  That’s it

Besides: discussions over where we ought to invest our collective resources are a subject for democratic debate and should be kept well away from the predatory hands of Wall Street.  This is because the determination of the efficacy of collective investment is a process that lies beyond the usual parameters applied by the banks and other financial houses.  They all use various notions of efficiency, where efficiency is usually defined as the greatest return on equity within a range of risks.  Those things are only computable if “softer” factors are excluded from the equations, and if the inevitable effects of uncertainty are constrained or assumed away.  But in public policy it is often the softer factors that are the most important.

So, perhaps, the silliness of the Game Stop stock price bubble can remind us that there are far more important things than stock prices and stock markets, and that the democratic process is a more important element in investment than our financier friends would like us to believe.  Let the fortunate few who have the ability to gamble on stock prices play their games, let’s fence them in safely so they can’t do harm to the rest of us while we build the next phase of our democratic economy.

With the emphasis on democratic.

Oh.  And we ought to tax financial transactions and capital gains with more gusto and determination.  The mystique of capital has allowed it to be privileged for far too long.

That’s democratic too.

  1. Gerald Holtham
    February 4, 2021 at 12:54 pm

    Should we have capitalism and should there be a stock market is one question. While we have them buying shares in companies is how many people of modest means save. 401 accounts and pension funds invest in stocks as well as bonds. “Only” 20 per cent of the stock market is great deal of money for that part of the 90 percent who are invested in it. It is of concern therefore that the market should be honestly run and price manipulation should be discouraged. A no-rules game is not one likely to favour the little guy or gal.
    While it is true that the stock market is not an important source of new capital for enterprises, it certainly affects the distribution of capital among companies. If the shares of company A boom while those of B stagnate, A can buy B much more easily than the reverse. Stocks are currency in the market for corporate control. Alphabet and Microsoft both maintain their position by taking over smaller potential competitors. While that is the case, it is in the general interest that stock prices reflect some underlying commercial reality rather than manipulation.
    Whether we have the perfect or even a good system is a different question from whether the system in existence is being regulated as well as possible, given its limitations. While we dream of a better world people have to live in this one.

  2. Ken Zimmerman
    February 17, 2021 at 4:10 am

    I am a long-standing fan of American western movies. One popular plot is the town with the big ‘strike’ putting a lot of money into the town. Bringing the saloon ‘entrepreneurs’ with the big gambling set up. Many in the town visit the saloons for drink, prostitution, and gambling. But few make it a regular habit or risk large amounts of money on their visits. Since with gambling, the house (in this case the entrepreneurs) always wins, the games of chance sometimes become sources of battles. Sometimes deadly battles. And periodically the ‘good government’ citizens (read regulators) clean out the entrepreneurs in the effort to bring justice and rectitude back to the town. Usually with the town’s new sheriff or newly missioned existing sheriff in the lead. People are booted out of town. Some are hanged or killed in fights. Others leave for greener and safer pastures. Lesson: in America there is an acceptable level of corruption and scalawagery that when breached leads to extreme reactions. In the earlier history of the nation, tar and feathering, ‘run out of town,’ or even lynching. Since the 20th century harsher regulation, imprisonment, or colossal fines. The level of this acceptance has always varied by region and period. But during the preceding 50 years it seems the acceptable limit on corruption and scalawaging has vanished. All types and levels are now acceptable in the US. In this change stock markets certainly lead the way. If stock markets, like the saloons of the towns of old west movies only effected the town and a minority of its citizens, this change would be of little concern to the whole nation. But stock markets in America now directly or indirectly have consequences for every aspect of life in America. These ‘markets’ must now, like the saloons be ‘cleaned up,’ ‘cleaned out,’ or ‘obliterated’ based on the level of threat they represent. In our present libertarian, sociopathic society, who is going to take on this work? And save us.

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