By John Summa
Reposted from the author’s blog, Dead End Economics.
In The Great Crash: 1929, John Kenneth Galbraith describes one of the defining characteristics of stock market manias as obsessive attention to stocks with the euphoric belief of making easy money on share prices rising. This recurrent obsession he later describes in his 1987 book, A Short History of Financial Euphoria, as representing “recurrent lapses into financial dementia” that “have not changed in any truly operative fashion since the Tulipomania of 1636-37.”
While such thinking is clearly a socially constructed product of capitalist society, early and late, Galbraith sees individuals and institutions being “captured by the wondrous satisfaction from acquiring wealth” no matter what the past tells us about the folly of such behavior. Given the GameStop mania, with share prices “going to the moon” before crashing (a pattern over 100 other meme-stocks followed), can we say that this qualifies as a Galbraithian mania (albeit a micro one)? While clearly a momentary, non-systemic event (i.e., unlike the subprime mortgage market boom and bust), GameStop would appear to fit into Galbraith’s morphology of speculative mania, with investors taking leave of their senses—and thus representing a form of market madness.
Doug Henwood writing in Jacobin described it as “one of the great bubbles of our time,” adding: “On Tuesday, January 26, more stock in GameStop was traded than in Apple, the biggest stock of all, with a total market value 108 times the retailer’s. As James Mackintosh of The Wall Street Journal put it, the price action and trading volume together suggest ‘widespread disturbance to people’s judgment.’”
So much for claims of market efficiency made by mainstream economists and known as the “efficient markets hypothesis,” which tautologically asserts that markets digest and reflect all known information quickly and are by definition always efficient. That is, markets must be efficient because their participants quickly incorporate known information into prices. The assumptions behind this belief are so ridiculous that it will require another post here to deal with. For starters, it assumes all market participants have equal access to information and knowledge of markets and act on it in an equally competent manner. Right. To be continued in a subsequent post.
Galbraith’s speculative episodes have common features. He sees every speculative mania, big or small, as fooling investors with something new or different—and these “artifacts” are typically innovations created by Wall Street. Meanwhile, he sees individual (and institutional) amnesia as operating to blind us to past patterns that would instill some sanity.
The GameStop buying frenzy, therefore, enabled by a zero-commissions gamified app (the latest novel Wall Street gimmick) combined with obsession by investors stoked on social media (largely Gen Z investors trying to game stocks) with little knowledge of the past, make this episode a classic mania, however brief. Let’s call it the “meme-stock mania”— a viral investor herd stampeding into stocks that drove the price higher.
Many Robinhood retail investors, having an average account size of just $3,500, jumped on the bullish bandwagon in the hopes that they would get quick gains [for more on this tsunami of buying and how it played into the hands of Wall Street insiders, who made billions of dollars from it, see my feature story on Robinhood published by Dollars & Sense in their January/February 2022 issue: “The Lure of ‘Democratizing’ Finance”]. According to Robinhood’s own data, Gen Z and Gen X traders made up 70% of its customers at the height of the early 2021 GameStop debacle. In fact, Robinhood says the average age of users of its commission-free, “gamified” app trading platform is just 31, according to Reuters. This younger crowd of traders, new to the stocks and options world, saw their plunge into the shark filled waters of Wall Street as different from earlier times—they had the power of social media at their disposal.
As Reuters noted, “These are young women and men who feel comfortable on digital communities, whether monitoring threads on Reddit, following tips on Twitter or swapping ideas in Slack groups.” Reports that Redditors stuck it to hedge fund pros got a lot of play in the media, but the SEC found that the bulk of the price surge in GameStop did not correspond to hedge funds buying to reduce losses. It was simply swelling numbers of buyers of shares that kept prices soaring.
Many no doubt bought at the top of the bubble, just before the bust. Resembling a pyramid scheme, where the earliest ones getting in usually make the money, reports have indicated many big Wall Street players were in very early and thus benefited from frenzied buying by the meme crowd. In fact, many of the Wall Street insiders wanted a short squeeze, too (an old game played on the Street), and thus benefited from the social media mob mentality. This dimension was unreported by mainstream media.
While there is always finger pointing by the media and politicians following market busts, Galbraith makes the important point that this actually distracts attention from important questions, like: Is there something fundamentally wrong with capitalism or financialized capitalism? Should individual and institutional speculation in financial markets be severely curtailed, or even banned? Is there something wrong with economic theory and how it renders markets (i.e., “markets know best”)?
While some people may ask these questions, they tend to be the exception. Focus instead is on the bad apples in the bunch (Robinhood), not the apple tree (such as hyper financialization of the economy, rampant inequality and neoliberalism) producing the bad apples. There is never any fundamental challenge to the ideological underpinnings of markets, an ideology that reproduces our class system through such markets, where a small percentage of financial and business elites disproportionately reap extraordinary gains from maintaining the status quo. This discussion is simply off the table.