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! Plus: Regional economic disparities and Hillary Clinton’s Unfortunate Remarks

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Our March/April issue is at the printers (and in e-subscribers’ inboxes). (Not a subscriber yet? You can subscribe now here!)

We just posted an article from the new issue–Jerry Friedman’s “Economy in Numbers” column, Growing Together, Flying Apart: Regional Disparities in American Politics and Economics.  Coincidentally, it provides excellent commentary on the remarks Hillary Clinton made recently, to great controversy, characterizing the parts of the country she won in the 2016 presidential election compared to those won by Trump:

“If you look at the map of the United States, there’s all that red in the middle where Trump won,” Clinton said. “I win the coast, I win, you know, Illinois and Minnesota, places like that.”

“I won the places that represent two-thirds of America’s gross domestic product,” she continued. “So I won the places that are optimistic, diverse, dynamic, moving forward. And his whole campaign, ‘Make America Great Again,’ was looking backwards.”

Jerry’s article talks about the regional economic disparities that have left Trump-voting regions (and rural parts of Clinton-voting regions) behind, and the political consequences of those disparities.

Here is the editorial note for the issue:

This Is Your Economy on Finance

The Dow Jones Industrial Average reached an all-time high of 26,616 points on January 26 of this year. That was after rising almost 8,000 points since Donald Trump’s inauguration. The Dow then fell over 2,700 points in early February, which met the technical definition of a market correction—a drop of at least 10% from a recent high. Since then, the Dow and other indices have gone up and down, but mostly up, since the correction.

What does this mean for the rest of us, and what does it tell us about the economy? Much of the business press would like us to think the rising stock market is good news for the economy; that was President Trump’s message in his first State of the Union a couple of weeks before the correction. But the business press tipped its hand when it explained the correction as markets’ reaction to lower unemployment and a minor uptick in wages. Why would investors consider wage increases bad news? According to John Miller, it’s all about class conflict—and about the disconnect between stock market investors (and stock values) and workers on “Main Street.” Even slightly higher wages lead investors to fear higher labor costs and inflation. But workers’ share of output remains low, and corporate profits continue to be at record highs—numbers which “reveal the unwillingness of the financial powers to share with workers the gains of economic growth.”

In the second part of her three-part series on deindustrialization in Keene, N.H., Marie Duggan gets into more detail about the adverse effects of a financialized economy, and its tendency toward financial bubbles, on workers. The story of how a local company, Miniature Precision Bearings, was acquired by a much larger company, Timken, shows how asset bubbles and financialization have contributed to deindustrialization and job loss. When management spends its accumuated capital manipuating stock price, the math means there will be less capital available for investment in the equipmient and people to produce quality product. The financial bubble of the 1990s seemed so great at the time with the rising value of pensions, but it turns out that the market wasn’t raising funds for industry, but rather was persuading industry to abandon product quality and investment in the company, workers, and community. The backstory of the decline of rural America may be the giant sucking sound of the stock market removing funds from the industrial base into stock price manipulation, given the 1990s bubble. This is all the more ominious, given that the rise of the stock market under Trump gives every appearance of being a bubble itself.

Gerald Friedman’s Economy in Numbers column in this issue tells a related story of regional economic disparities and their political consequences. As Friedman points out, federal policies favoring Wall Street have been better for urban areas on the coasts, but have contributed to deindustrialization and lagging income growth in other regions (and, as we see from Duggan’s article, non-urban parts of coastal regions are also falling behind). Both political parties’ embrace of neoliberalism has eroded the safety net and has neglected industrial policy.

This issue’s cover story suggests an alternative understanding of finance and monetary policy that could point to a way out of neoliberal economic policies that have led to these regional disparities and to widening inequality. Modern monetary theory (MMT) addresses the connection between lending (and debt) and money, and undermines the standard views of taxes and deficits that justify austerity policies. MMT points to a way to stimulate the economy by providing the finance and credit people need to buy products, and that businesses need to be able to sell their products, and in that way moving economic policies beyond austerity and deficit fear-mongering. The MMT approach could finance government policies—including infrastructure spending, direct job-creation, national health care, and industrial policy—that would lead to full employment and greater equality.

Also in this issue: Arthur McEwan tallies up the economic costs of Puerto Rico’s ongoing crisis, Noah Berlasky lays bare the neoliberal foundations of the self-help literature, and more!