Flash mobs, financialisation, and the future of liberal democracy

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There are so many amazing business and economic stories right now, but in some ways, there is only one: GameStop. This crazy rollercoaster ride of a market rout, which (for those who’ve been living under a rock) involves average Joe day-traders connected by the social media site Reddit using apps like Robinhood to put the squeeze on professional hedge funders, tells you almost everything you need to know about our current economic, political and cultural moment. 

Here are five of my own takeaways from the story (for every scintillating detail, read the FT’s extensive coverage of the tale, here). I’m going to be thinking and writing about this one for a long time to come.

• The SEC is now looking closely at whether to crack down on apps like Robinhood, which have technologically enabled retail investors to do the sort of speculation that professionals have been doing for ages. But that puts the regulator in an incredibly weird position — it has a mandate to protect investors, particularly the little guy. But by cracking down on retail trading apps rather than systemically changing the entire system (not politically possibly, at least not all at once), it risks being perceived as backing Goliath over David. The one bright spot here is that there’s nobody better than the future SEC chairman Gary Gensler, a decentralised tech expert and reform-minded financial regulator, to get the balance right.

• On that note, I’m in agreement with Bill Gross that there is a commonality between the Flash Mob that ran up the value of GameStop, and the band of rioters that stormed the Capitol Building a few weeks back. This is about individuals feeling that they have no voice or power within a system of American oligopoly.

• There is a bizarre political overlap in America between the far-left and the far-right. As Democratic congresswoman Alexandria Ocasio-Cortez put it: “We now need to know more about Robinhood’s decision to block retail investors from purchasing stock, while hedge funds are freely able to trade the stock as they see fit.” Guess who agreed with her? Republican Ted Cruz, who said he’d team up to support a Congressional hearing on the topic.

• The advent of the printing press led to 150 years of religious wars before it gave us the Enlightenment. The GameStop story is illuminating everything from the still simmering anger over who did and didn’t get bailed out in the financial crisis, to whether we live in a rigged system, to what the limits on freedom of speech should be. How does this story end? And how do you trade it in the meantime?

Peter, how’s that for a prompt for your first Swamp Notes response? I’d love to hear your thoughts on all of the above, and also ask readers to send thoughts about the highest level implications of this amazing story.

Recommended reading

• To keep reading about the froth on Wall Street and what it portends for us all, check out the FT’s “Runaway Markets” series, here.

• For those who missed it, I absolutely loved Ed’s last pre-book leave commentary piece on why America needs to put aside toxic history wars.

• Everybody covered it, but the NYT’s Matt Phillips and Taylor Lorenz did a particularly wonderful narrative job with the GameStop story. Guys — you need to write this movie . . . 

• And just for fun, I’m sharing an NPR story on my wonderful outdoor Zumba class in Brooklyn, which has been my lifeline to sanity during Covid.

• Only Shoshana Zuboff could write a full two-page New York Times op-ed that is not indulgent but totally necessary. Read every word carefully.

Peter Spiegel responds

Rana, I’m glad you chose the GameStop frenzy as the topic of my inaugural Swamp Notes because I’ve been musing all weekend about the full-throated enthusiasm for vigilante day-traders in some corners of Wall Street and Washington. I woke up on Friday morning to Canadian businessman Kevin O’Leary screaming on CNBC that regulators have no business intervening to prevent the trading mania, relying on sophomore-year efficient market theories that I thought I’d left behind in my second semester seminar on libertarian thought (apologies, Alan Kors). Did any of these people live through the 2008 financial crisis? Remember when the “efficient” market in mortgage lending almost destroyed the entire US economy? Apparently O’Leary has a short memory. 

I find your reference to Bill Gross’s thoughts on the matter far more intriguing, maybe because I also agree with him — though with perhaps a more jaundiced view. In a recent reprint of Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds, law professor Russell Napier writes that there’s a good reason the 1841 classic is still in circulation: we keep thinking there is more collective wisdom in the collective than madness in the mob — and we are constantly surprised when the crowd goes wild. It keeps happening, decade after decade; our modern world has even coined a new phrase for this delusion: crowdsourcing. 

So while you may see the GameStop frenzy and the Capitol Hill rampage as examples of disempowered Americans raging against oligopolies, I worry that it’s just madness — fuelled by social media, which may make these spates of madness more frequent. I’m not usually one to blame Facebook or Reddit for all our current ills. Those same tools that allowed QAnon to rally followers for insurrection, and r/WallStreetBets to cripple Melvin Capital, also enabled Hong Kong student protesters to organise against Beijing’s repression and young Americans angered at George Floyd’s killing to remind everyone that Black Lives Matter, in cities across the country. 

Is there a policy answer to madness? Is there a way to stop the “bad” mobs and encourage the “good” ones? I suspect not. Sometimes the answer is as simple as enforcing the law. If you break into a federal building hell-bent on harming elected representatives, you should expect to be arrested. If you manipulate stock prices, you should be fined. If you protest peacefully against police violence, you should be left alone. We’ve dealt with the madness of mobs before, and Mackay reaches out across the centuries to remind us it will happen again.

US managing editor Peter Spiegel is filling in temporarily for Edward Luce, who is on book leave.

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And now a word from our Swampians . . .

In response to ‘The west’s vaccine myopia’:
“Fixing things at home versus engaging abroad is a false choice. To be an effective global competitor and leader, the US has to strengthen its capabilities at home or it will fail the tests posed by international trade competition, which is always hard-nosed. The US has no choice but to improve its infrastructure and human capital or continue its slide towards second tier status.” — Paul A Myers, Corona del Mar, California