GameStop and the Mechanics of Inverted Totalitarianism

By Sasha Breger Bush

During the week of January 25, a motley crew of day traders who had previously organized online via social media, including on a Reddit forum called WallStreetBets, made an organized effort in the U.S. stock market to take down some hedge funds. The hedge funds in question, including Melvin Capital and Citron Capital, were heavily involved in “shorting” stocks, i.e., betting that the share prices of certain companies like GameStop would fall. Short selling stocks means that a trader first sells high and then buys low, which requires short sellers to initially borrow shares from a dealer. These borrowed shares are sold at relatively high prices, with these sales pushing the share price lower. When share prices get low enough, the short seller buys them back from the market and returns the borrowed shares to the dealer. Hedge funds do this often and profit mightily from the destruction of other companies (whether these companies “deserve” to be destroyed in this way is a topic for another day).

Already wise to such strategies on the part of hedge funds, the day traders coordinated a “short squeeze.” As short sellers sold their shares, the Redditors bought them up, buying more and more shares, pushing the share price up and up. As prices rose, hedge funds could not complete their shorts, unable to purchase shares back from the marketplace at a low enough price. As the GameStop share price rose, the cost of closing out the short positions rose alongside it, and hedge funds rapidly plunged towards insolvency. The short squeeze was amplified by the fact that dealers had lent out more shares of GameStop to short sellers than actually existed in the marketplace (i.e., a single share was lent to short sellers multiple times, such that at its peak short interest represented some 140% of the public “float”). Among other hedge funds, Melvin Capital and Citron Capital lost billions of dollars.

Even as many Redditors stood to lose their life savings, Melvin and Citron received major emergency cash infusions from other big financial institutions, including Citadel Capital and Point72 (owned by Ken Griffin and Steve Cohen, respectively). Robinhood, TD Ameritrade, and other major day-trading platforms also helped the hemorrhaging hedge funds by introducing curbs on trading in certain stocks, including GameStop shares, that prevented the Redditors from completing their short squeeze play. The struggling hedge funds also got help from Big Tech: Discord shut down one of the social media platforms upon which Redditors were organizing, and Google removed some 100,000 negative reviews of the Robinhood app in its Play Store (Apple was also accused of removing negative Robinhood reviews from its App Store). And the hedge funds were given a further leg up from Big Media, with pundits and talking heads from major media outlets like CNN and MSNBC taking to television and the internet to decry, with no sense of irony whatsoever, the Redditors’ “market manipulation,” “gambling,” and general irresponsibility.

In much the same way that removing a watch’s face permits one a glimpse of the clockwork inside, so too has the recent GameStop saga provided an opportunity to more clearly observe the machinations of the inverted totalitarian state that is consolidating its power over the American people. The GameStop story is a bit like an octopus, with tentacles unfurling in many directions at once. It is difficult to say where these events may lead—especially as federal prosecutors and Congress begin their investigations into potential manipulation and malfeasance—but I would like to share some of my observations and elements of the context within which I have been trying to make sense of them.

In late 2016, I wrote an article for Dollars & Sense called “Trump and National Neoliberalism,” in which I argued that Trump’s election represented an unmasking of an increasingly totalitarian corporate state. The election of Trump—a real estate magnate and Wall Street native with no experience in public service—seemed to me to be a clear symbol and consequence of the effective merger between state and market. This “inverted totalitarian” arrangement (rooted in the work of Sheldon Wolin and Chris Hedges) is one in which the remaining vestiges of democracy conceal a highly unequal and undemocratic political economic system in which corporate monopolists and governmental leaders work together to preserve monopoly and elite profits at the expense of the masses. The GameStop saga usefully strips away some of the disguises this authoritarian regime likes to use to conceal itself, and thus provides an unusually clear example of the mechanics of inverted totalitarianism.

The inverted totalitarian regime typically wears a “democratic” disguise. For decades now, we have heard Wall Street justify its predatory and manipulative behaviors with appeals to “democracy” and “democratizing finance.” For example, this rhetoric was invoked by Wall Street and the World Bank, among others, to push derivatives instruments on small farmers across the global South, a dynamic documented in my 2012 book Derivatives and Development. As I argued there, these instruments are wildly mismatched to the needs of farmers and to the constraints they face and serve to subject especially smallholder farmers to the needs of large financial institutions, as well as to greater risk given the extent of speculative activity in commodity derivatives markets. That global financial markets have become larger, deeper, more sophisticated, and more prone to speculation, manipulation, and predatory and exploitative practices over the same period in which they were purportedly “democratized” is a key point to hold in mind, as it is just this sort of financial exploitation of ordinary, working people at the hands of Big Finance that motivated some of the GameStop day traders to trade in the first place (more below).

This same rhetoric about “democratizing” finance was invoked in the US in the run-up to the Great Recession, as a tool to legitimize sales of shoddy mortgages to working families. In a now-fascinating speech (with the advantage of hindsight), Federal Reserve Chairman Alan Greenspan noted in 1997 (a full 10 years before the U.S. mortgage bubble burst) that the “democratization” of capital markets had extended credit and lending services to communities that had been previously excluded, but with some worrying signs that such efforts were increasing individual and systemic risk, including in mortgage markets: “Some loans to low- and moderate-income families with multiple underwriting flexibilities, layered subsidies, and high loan-to-value ratios have been showing unfavorable delinquency and default trends. Large mortgage lenders, secondary market agencies, and private mortgage insurers are conducting studies of their portfolios to determine how more-relaxed underwriting standards are affecting delinquencies and defaults.” While certain practices had been flagged by key regulators at least a decade prior as being potentially harmful to retail consumers, the manipulation of mortgage markets and predatory lending practices that contributed to Great Recession continued, nonetheless (see also this speech from April 2000 by Reserve Board Governor Edward Gramlich, in which he suggests that predatory mortgage lending undermines “recent efforts to democratize credit markets”).

And, not surprisingly, this faux-democratic sensibility again appears in all its splendid hypocrisy in the GameStop context. Robinhood sold stocks to ordinary Americans in the name of “democratizing finance for all” (this is actually the company’s motto; I kid you not), pocketed fees and commissions, and then threw millions of day traders under the bus to save a handful of hedge funds. (That said, it is pretty widely understood in financial circles that the real end game here for Robinhood is to protect the market positions of Citadel Capital, through which Robinhood routes its orders, e.g. here). It is conspicuous indeed that many of the Redditors were motivated to purchase GameStop shares by their devastating experiences during the Great Recession (2007–2010), with some day traders seeking justice for family members who had lost their homes, jobs, savings, and even their lives, in the crisis. (Another apparently open secret: that the long positions in GameStop during that crazy trading week at the end of January were not just held by day traders. Some very large and very wealthy players also rode the wave upward, drafting the day traders to turn big profits. Whether this was a “pump and dump” scheme, and who may have been involved, remains to be seen.)

The GameStop saga brutally shreds the democratic disguise, allowing a clear view of the open and explicit coordination among very large and wealthy firms operating in different sectors to achieve common goals at the expense of ordinary, working people. (One of the most interesting parts of this whole story for me, honestly, is just how transparent this all is.) Large Wall Street firms were actively supported and uplifted by friends in Big Tech and Big Media in order to protect their market position from competition. And it is worth mentioning that this is the second time in only a month or two that we have seen this incredibly creepy and dystopian sort of “monopolistic solidarity.” But while the first instance—the coordinated de-platforming of the social media company Parler by Amazon, Google, and Apple, which removed Twitter’s main competitor from the marketplace—is wrapped in the hyper-partisan and hyper-identitarian politics surrounding the January 6th riot at the U.S. Capitol, the GameStop episode is usefully disrobed.

To this point, the inverted totalitarian state also often conceals its power and interests with partisan and identitarian propaganda. But, as with the democratic disguise, the GameStop saga reveals that the complex partisan and identitarian political and cultural conflicts that characterize U.S. politics today are actively oversimplified, spun, aggravated, and leveraged by political economic elites in a classic divide-and-conquer gambit to distract us from yawning vertical inequalities in wealth and power, thereby undermining our opportunities to unite against the regime. A few things stand out to me here by way of illustrating this point.

There have been a lot of rather shameless invocations of the events and polarized discourse surrounding the January 6 riot at the Capitol to smear the day traders. For example, Discord labelled the Redditors as extremists involved in “hate speech” and “glorifying violence” (this was the reason given for banning the WallStreetBets forum), echoing the rationales for booting Parler in previous weeks. Newsweek reported that far-right extremist groups were using various WallStreetBets forums on social media to promote anti-Semitism and Q-Anon conspiracies.

In a conversation with NASDAQ CEO Adena Friedman on CNBC, Squawk Box host Joe Kernen noted that the same problems with “disinformation” that sparked the Capitol riot were apparent in the GameStop context, and called for “regulation” of the social media platforms being used by the Redditors. Former SEC Commissioner Laura Unger similarly noted the similarities between the events on CNBC, and, like Kernen, used the analogy to leverage support for a crackdown on the day traders: “It puts a lot of questions about the integrity of the market, everyone is scratching their heads over this. What should happen? What can be done to stop this? … Not unlike what we saw on January 6 on the Capitol. If you don’t have the police in there at the right time, things go a little crazy.” Congresswoman Alexandria Ocasio-Cortez (D-NY) refused to work with Congressmen Ted Cruz (R-TX) on investigating Robinhood, citing her perception of his role in the Capitol riot as reason not to work together on this important issue.

It is hard to conclude about a story that is ongoing and that has such potential reach in US and world politics. But I think there are a few important questions to keep in mind as this saga unfolds, especially as regulators and public officials are poised to investigate further in coming weeks.

  • Most generally, I wonder if corporate and governmental elites will continue to pretend that this was an isolated incident of market manipulation that is somehow unusual or uncommon, as Senator Elizabeth Warren (D-MA) seemed to suggest in her recent letter to the SEC. As I note above, the major political-economic dynamics at issue in the GameStop saga are neither new nor infrequent. Rather, financial market speculation, innovation, and expansion at the expense of ordinary people has been a central and widely criticized aspect of open global financial markets for decades. In fact, the distortions that Warren specifically points to in her comments, i.e., the disconnect between share values and “fundamental” values that arise from treating stock markets like “casinos,” was discussed at length by John Maynard Keynes in 1936, though Keynes metaphorically referred to “beauty contests” rather than casinos.
  • I also wonder if the really heavy hitters, like Ken Griffin and Steve Cohen, will get a pass from regulators and officials or, rather, if they will be pressed and pushed to discuss and provide evidence about their role in Robinhood’s decision to stop trading in GameStop and the 12 other stocks on which trading was halted and then subsequently curbed. On the one hand, these two hedge fund billionaires have donated an awful lot of money to political campaigns over the years, to Democrats and Republicans alike, and seem to be big players in the sprawling elite political ecosystem (see, e.g., here and here). And, Citadel directly paidS. Treasury Secretary Janet Yellen, who will be overseeing investigate efforts into GameStop, more than US$800,000 in speaking fees, most recently in October 2020. On the other hand, it will be very difficult politically for regulators and officials to merely denounce Robinhood and the day traders for “gambling” and “manipulation”, all the while maintaining cover for those very wealthy parties who do so professionally on a regular basis. The more obvious the corporate totalitarian state becomes in its efforts to maintain elite wealth and power at the expense of ordinary, working people, the larger the political cost of such blatant hypocrisy.
  • Last, I wonder if we hear from the Redditors again anytime soon. For my part, I hope we do.

New Issue!

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Our January/February issue is finally out–sent to e-subscribers a couple of days ago, and in the mail to print subscribers.  We most recently posted David Bacon’s contribution to the issue, What Trump Can and Can’t Do to Immigrants, especially timely given Trump’s recent executive orders.

Here is the issue’s editorial note:

Arise!

If you’ve just awakened from a Rip Van Winkle-like sleep, you should probably stay lying down for a little while. You’re in for a shock.

A presidential candidate who slandered Mexican immigrants as criminals and rapists, claimed a Mexican-American judge was inherently biased against him, called for a ban on Muslims coming to the United States, called for compulsory registration of Muslims in the country, boasted of sexually assaulting women, insinuated that gun advocates might assassinate his opponent, and pledged to abide by the election result “if I win” … was elected president.

Here’s another shocker. Who among us expected to hear the Republican nominee for president—just four years after the party’s nominee was private-equity mogul Mitt Romney—say the following, as Donald Trump did in a October 2016 speech? “The establishment has trillions of dollars at stake in this election. For those who control the levers of power in Washington and for the global special interests. They partner with these people who don’t have your good in mind. … It’s a global power structure that is responsible for the economic decisions that have robbed our working class, stripped our country of its wealth and put that money into the pockets of a handful of large corporations and political entities.”

The leading figures in the mainstream of the Democratic Party certainly did not expect an adversary raging against corporate globalization (even with the anti-Semitic dog whistles audible in Trump’s denunciations of the “global elite”). For decades, leading Democrats had bought into the neoliberal economic agenda, steering away from policies that could get them branded as “anti-business.” They derided criticism from the left as juvenile and quixotic, not dreaming that they would be outflanked on the right by a populism like Trump’s.

The analysis by liberal and progressive commentators since the election has focused largely on why Trump won and what it says about the country. We have to remember, however, that election results are not revelations of the national soul—especially not under the United States’ non-majoritarian presidential election system. The overt racism, nativism, and misogyny of Trump, his allies, and supporters are important facts about the United States today, but they are not the singular truth about the country or its people.

Yet there is nothing to be gained by minimizing what Trump has conjured. He tapped into widespread sentiments of grievance in a manner typical of right-wing populists: simultaneously directing his supporters’ ire at (some of) the wealthy and powerful and (some of) the poor and marginalized—blaming both, jointly, for the ruin of the country. The people Trump speaks to and claims to speak for are overwhelmingly white, predominantly male, and the grievances to which he gives voice are not simply those of workers and poor people in general. They are, rather, the particular grievances of those who recoil at gradually sinking into a mass they see as beneath them.

The articles in this issue attempt to dig deeply into both what has gotten us to this point, and what are possible ways forward.

Our cover article for the issue, by political scientist Sasha Breger Bush, argues that what we’re seeing is not the end of neoliberalism, but rather its transformation, from globalized neoliberalism into “national neoliberalism,” and its culmination: a corporate capture of government now more complete than ever.

Steve Pressman and Gerald Friedman both add depth to our understanding of Trump and what he represents. Pressman explains Trump in light of the squeeze on “middle class” incomes and the rise of economic inequality. Friedman adds to his previous analysis of American nativism (the November/December 2016 cover story) an “Economy in Numbers” on U.S. immigration in the current era.

David Bacon and Frank Ackerman, meanwhile, turn from retrospect to prospect. What does the coming period hold in store? Bacon focuses on immigration policy, noting the constraints under which a Trump administration will operate. Even in an era of increased border enforcement and deportations nationwide, Bacon argues, immigration policy will continue to be driven by employers’ need for a cheap and controllable labor force.

Meanwhile, Ackerman looks at the prospect for meaningful climate action, even with the Denier-in-Chief in the White House. He argues for a consortium of U.S. state and local governments—a “Green-State America”—committing to meet the emissions-reduction goals set down in the Paris climate agreement. “And this could be a model for other issues,” he concludes. “Green-State America might also want to support international treaties on the rights of women, the treatment of migrants, the rights of indigenous peoples, and more.”

To be sure, there will be many struggles ahead. Time to arise.