After nearly a year of living with COVID-19, the public health aspects of the disease are now well understood. But the economic impact of the crisis continues to mystify.
On the one hand, the pandemic has triggered the most severe recession in living memory: national income has collapsed, unemployment is rising, and many households and businesses are struggling to survive.
But on the other hand, stock markets are booming, house prices are soaring, and the rich appear to be getting even richer. How can this be reconciled?
The frenzy surrounding the troubled US video game retailer, GameStop, provides a useful case study. After years of struggling to keep pace with online competition, many analysts expected that COVID-19 would be the final nail in the coffin for the high-street retailer. Sensing a vulnerable victim, hedge funds swooped in and placed big bets that the share price of GameStop would decline (known in the industry as ‘short selling’).
In another universe, the story would have ended here: GameStop would have continued to decline, hedge funds would have cashed-in, and barely anyone would have noticed.
But things didn’t quite turn out that way. Instead, the share price soared from $20 on 11 January to a high of $483 last week, representing one of the greatest stock market rallies of modern times. The official narrative is that an army of amateur investors organised on the online forum Reddit to purchase GameStop shares and drive the price up. In doing so, they managed to inflict significant financial pain on the hedge funds who had bet against the company, while making a tidy profit themselves.
Commentators were quick to hail the GameStop story as a triumph of ordinary citizen investors over major Wall Street speculators. Alexis Ohanian, the co-founder of Reddit, described the event as a “bottom-up revolution” that has irreversibly shifted power to small investors.
While this ‘David vs Goliath’ narrative undoubtedly captured the world’s imagination, the reality is less romantic. It is now widely believed that well-resourced professional traders played a major role bidding up the share price by posing as ordinary members of the public on Reddit. Some have gone further and suggested that much of the share price volatility has been driven by “internecine hedge fund warfare” – hedge funds covertly placing large bets against each other using the Reddit media frenzy as a convenient smokescreen.
Either way, the fact that GameStop’s biggest shareholders are some of the world’s largest investment firms such as BlackRock and Fidelity should pour cold water over the idea that this was a battle between big finance and small plucky investors. It was these Wall Street behemoths – not Reddit users – who stood to gain the most from the boom.
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Laurie Macfarlane | Radio Free (2021-02-04T10:10:21+00:00) The GameStop frenzy shows why we can’t let casino capitalism drive the COVID recovery. Retrieved from https://www.radiofree.org/2021/02/04/the-gamestop-frenzy-shows-why-we-cant-let-casino-capitalism-drive-the-covid-recovery/
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