A few thoughts on short selling, “GameStonk” and hedge funds

There are a number of issues at play in the “GameStonk” short-selling story last month, but what this made clear is how little people understand about the stock market. Despite the rhetoric from some folks who really ought to know better, the stock market not a casino. People invest based on market analysis that stocks will go up or down. That is not the same as spinning a wheel or throwing dice. Yes, sometimes people are wrong, and lose money. Generally, though, the stock market has grown dramatically over the last thirty years.

Despite the populist rhetoric about the stock market allegedly not producing anything of value, there are public benefits to selling stocks. When corporations become publicly traded, selling stocks to the general public enables them to grow, invest, serve more customers and hire more people. Over 50% of Americans own stock, which helps them earn extra income and plan for retirement.

What we had with GameStop is “short selling.” Let me explain it in very simple terms: Someone borrows stock and sells it, with the agreement that he will buy that stock back after the stock decreases in value. So Person #1 sells $100 in stock for Person #2, and a month later buys the stock back for $50. Then Person #1 gives Person #2 his stock back plus ten dollars, and then pockets the remaining $40.

Some would say this is immoral. It is not. Any market strategy can be done in an immoral manner, but it is not automatically immoral. If a market analysis plus an analysis of how the business is running leads one to conclude that the stock will decrease in value, that is not manipulation or a moral problem. What some folks on social media did is buy GameStop stock, leading it to artificially increase in value. The hedge funds, instead of buying back the stock at a lower price, had to buy it at an inflated price and lost money.

That is not the only way short selling can lead to a loss, of course, but short selling does bring risk. Even with that risk, that is not the same as gambling. It is based on market analysis. Had the folks on Reddit and Discord not interfered, the plan would likely have worked. But whatever the reason for short selling plan failing, the greater problem is when government bails out large Wall Street firms and hedge fund managers. When you take a risk, you should bear the brunt of that risk instead of forcing it on the taxpayers.

Finally, connecting a bunch of anti-corporate trolls on Reddit and Discord to “white supremacists” and “Nazis” is laughable. That is not the argument of a serious person. That is someone who wants to smear those who are doing things he does not like. It is a reprehensible slander.

The reason the “GameStonk” scheme is part of a larger populist uprising is that people feel like they carry the risk of their financial decisions, while the big banks and Wall Street billionaires do not. Government created this resentment with bailouts and corporate welfare, as well as the abuse of government regulations to benefit well-funded and politically-favored interests against their competitors. Will “GameStonk” be the start of much-needed reforms, or will this just be another story that blows over in a few weeks with nothing accomplished? I am hoping for the former, but betting on the latter.