Capitalism and the GameStop Short-Squeeze

GameStop
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Last week, many small investors made a fortune from their investments in GameStop, a video game retailer that—by most accounts—is becoming obsolete. Due to a collective enthusiasm generated in the subreddit community r/wallstreetbets, GameStop shares went from below $3 to over $300 in less than a year. Because of the success of GameStop, investors are now looking for similar companies (also called “meme stocks”), notably AMC and Blackberry, where they can profit once again. 

Meanwhile, large hedge funds have lost great fortunes and are now facing bankruptcy. These investors, particularly those from Melvin Capital, were in the process of shorting GameStop stock. Jim Geraghty at National Review gives one of the clearest explanations of what shorting means: “Hey, I’d like to borrow your car, sell it, wait for it to decrease in value, buy it back at a lower price, keep the difference and then return it to you.” Replace car with stock, and this is what happened with GameStop. However, the stock did not decrease in value like it was supposed to, but instead increased over a thousand percent, resulting in massive losses for short sellers—the shorts were “squeezed.”

In response to the surge in activity, and consequent shock to the market, popular trade platforms for retail investors have prevented or severely limited buying shares in GameStop and other meme stocks. As one could expect, these moves have led some to cry foul against a financial system that is rigged against individual investors. All the same, the hedge funds that shorted these meme stocks continue to lose billions of dollars—and stand to lose even more.

In the past few days, three narratives have emerged. The most popular narrative, especially among conservatives and certain leftists, portrays the retail investors as populist folk-heroes, taking on the incorrigible fat-cat elites on Wall Street. For the longest time, these hedge funds have profited from the decline of businesses like GameStop, and have even broken the rules to profit even more—like when Melvin Capital shorted 40% more shares than existed. It is therefore fitting that the little guys beat these types at their own game.

Naturally, the second narrative reverses this interpretation—it casts retail investors as white supremacist allies of Trump, who hope to make a point by taking down large investment firms. They are unfairly gaming the system by purposefully inflating the stocks of declining businesses. Furthermore, one can assume that the so-called elites have probably joined in this rush, countering the idea that this is a populist revolt. In any case, the stock exchanges, trading platforms, and treasury department should all intervene to cancel these deplorable disruptors. 

The final narrative that has emerged last (and sadly, receives the least attention) relates to the collateral damage of these short squeezes. In order to pay for their losses on GameStop, a company in decline, large investors have had to pull their money out of companies with solid prospects. Outside the meme stocks, many other stocks have decreased in value, from large companies such as Apple, Microsoft, and Boeing, to a host of innovative, mid-level, and smaller companies. 

In the short term, this causes investors who bought shares of companies that they believed would turn a profit, to lose money. It also limits the amount of capital available for companies that could use it. In the long-term, a repetition of short squeezes like GameStop could precipitate a market-wide crash—driving so many businesses into bankruptcy, and putting people out of work. 

So which narrative should Catholics support? Clearly, most will probably sympathize with the little guys on Reddit taking down the big guys on Wall Street. Considering the other setbacks experienced by Americans in the past year, the David-Goliath narrative is deeply satisfying and feels like poetic justice. 

Unfortunately, everyone should recognize that if the established actors in finance go down, they would inevitably bring everyone else down with them. Not only does the third narrative indicate the logical endpoint of this activity (a market crash), but it also exposes the real problem in this situation, which is the financial system itself.

For centuries, the Church stood against the practice of usury, or lending money at a price. They did so because (1) it is condemned in Holy Scripture (DT 23:19-20), and (2) it violates the nature of money. As Saint Thomas Aquinas explains, “[usury] is a case of selling what is non-existent; and that is manifestly the setting up of an inequality contrary to justice.” In other words, money should not make money. It is a tool for exchange and does not have the capacity to generate more of itself. Charging people to use money (the literal definition of usury) is necessarily exploitative, and leads to a class dichotomy of lenders and debtors. 

The way capitalists have worked through this problem is to recast money as capital. The money borrowed is really just the liquid form of assets that an entrepreneur uses to start a profitable business. In addition to banks and other lenders, capital can also come from investors who buy shares of a business, and assume a share in the risk of the entrepreneur. This financial system has been responsible for the great material wealth and innovation that has continued since the Renaissance.

However, capitalism starts to falter when the financial system becomes so centralized and so complex that wealth creation is dis-incentivized in favor of gambling. The value of currency itself is manipulated, and large, “too big to fail” investors have the power to bring down the rest of the economy. What results is a periodic bubble-burst cycle—one that punishes workers, and elevates a class of unscrupulous elites who rig the system in their favor. 

This does not mean that Catholics should reflexively endorse socialism as the virtuous alternative to the corrupted capitalism currently reigning in America. Nor should they necessarily adopt the intriguing (yet unrealistic) distributist system, endorsed by intellectuals like G.K. Chesterton and Hilaire Belloc, which essentially proposed making everyone either a farmer or small business owner. Rather, in their own capacity, Catholics should stop playing this game and enact reforms where needed. This requires education (learning from things like GameStop), charity, and bravery on the parts of business owners and workers. Bad actors thrive on ignorance and fear, no matter what system is in place.

By all means, Catholics can cheer on the little guy, but they should also remember that many of these little guys are not so little anymore—and have made millions in a matter of days. They will be fine, but others may not be so lucky. That’s why Catholics and others of goodwill should take this opportunity to reassess a system where this kind of situation happens, and work to improve it for the sake of the greater community.

[Photo Credit: Tiffany Hagler-Geard/Bloomberg via Getty Images]

Auguste Meyrat

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Auguste Meyrat is an English teacher and department chair in north Texas. He has a BA in Arts and Humanities from University of Texas at Dallas and an MA in Humanities from the University of Dallas.

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