Week 17: The Shortcomings of Neo-liberalism - Part 2 (Reddit vs the billionaire hedge funds)

The little man in the big stock market game got a double Christmas bonanza 2020/2021. This is all to do with some social justice motivated individual traders (Reddit), a stock for a company running an outdated business model of physically selling video games in the era of Netflix (GameStop) and "fat cats" big stock broking and hedge firms. In Just four months the little traders were able to push the price of GameStop Corporation stock from a low $9.36 on 7 October 2020 up to a high of $483 on 28 January 2021 - increasing the price 50 times over! This resulted in the 'fat cats" loosing 50 times over as they had bet on the demise of GameStop.

This one off event may seem disconnected to what is so repugnant with Neo Liberalism but hold on for just a little while to the steps that lead to one of the weakes pillars of the Neoliberal paradigm - its disconnect from the social context of the human need.

In finance 101, a potential investor studies a corporation. If convinced that it is solid and will do well in the future, the investor buys the stock (invests in the company) and logically makes money as the stock price goes up (company sale price) and dividends are paid out (profit share). Simple logic.

In this old game, the investor needed to have the money at hand (or borrow it from a bank) and deposit it in the corporation's stock site and have a share certificate as evidence of ownership of that n/th of the corporation.

But this was the game in 1929. In 2020 - the stock market is on steroids.

To explain the Christmas for redditors to the extent that a 10 year old can beat an ivy league educated stock trader ( for instance 10 year old Jaydyn Carr invested the equivalent of 6,000 Kenya shillings and walked away with 320,000 Kenya shillings) allow me to relate it with something perceptible in our every day reality - instead of calling it the stock market, lets call it the candy store.

To pump in the steroids in the candy store (aka move the money a bit faster) the candy store tried to solve a series of investor problems:

Investor's problem 1: My birthday party is a month away and I really want to have this candy in my party but I don't want to buy them today - they would be a bit stale then. However am worried the demand will be so high they could run out on my birthday.

Candy store response 1: No problem! I can do you a favor and save some candy for you for your special day. For that favor, we can lock a price today favorable to me and you. A win win situation - I am guaranteed the sale you are guaranteed the candy. Forward contract (and if traded in a regulated candy market aka stock market - Future contract)

Investor's problem 2: I know this candy will be a big hit among my peers but unfortunately I do not have the whole pot of money today. Am also not big with candy just leveraging on my wittiness in getting to know a hit and a miss. I want to have that flexibility to test my hunch. So to say - sit back and watch the store a bit and see if the candy is a hit. If am right I can then have a sort of favor with you to lock in the bet of buying (or even selling) some candy in the future ?

Candy store response 2: No problem! I can guarantee you the amount of candy you may or may not want to buy in the future at an agreed fixed candy price today. Simply place a bet of how much you would be willing to pay for it in the future and pay a small retainer fee today as a promise to your word (a kind of insurance to confirm our agreement). In the future if the price is above what you promised to pay then you can happily pay at the agreed price that is below the store price (and even go straight and flog it to another buyer at the market price and make an instant profit). If the future price of the candy is lower than what you locked to pay - you can simply ignore the bet (allowed in our agreement) and walk to the store and buy at the lower price - or even not buy any candy at all! Sounds good right - i comes the Options with all infinite shades (Call option - right to buy, Put option - right to sell, European option - wait till agreed time to exercise your bet, American option - you can call in the shots any time before the end, British option - you can call in before but at specified period between,Asian option - price paid is not fixed but an average of the candy price over a given period of time. Bermudan option - you can call in at only set dates)...the styles and specs and fancy names keep growing by the day

Today many big players in the market play on problem no 2. In fact, often times they have no desire for the candy - just the money in it.

When we humanize the candy, then we can truly perceive the pain point.

(image of a homeless person in Vancouver, Canada, ) Like many other high end cities in the global North, Vancouver has enough housing units to house all its residents. However, these are not necessarily owned by people interested to live in the house (the human utility desired) but by investors disconnected to the utility of the housing unit and instead betting on the price of the house as an investment unit.Sarcastically speaking, a dog can own an empty high end house in the city as a human being sleeps in the blistering cold of winter wading off stray dogs from his decaying feet.

This kind of game of "freedom to own" and "privatization" quickly takes an evil turn revealing the dark human nature of greed when a player in the market (the professional stock market broker) stokes the flames that ignite the price fire. This has been witnessed repeatedly in west. 2000 - 2001 Enron scandal where unscrupulous traders manipulated the price of electricity in California leading to an 8 fold price increase. The traders pocketed at least $1.6Billion laughing all the way to the bank making disconnected investors very happy and whetting their appetite for the next big gig.

Meanwhile innocent families caught up in the investment Russian roulette were left in the blistering heat, to the extent of deaths. The same game played out in 2007 -8 subprime mortgage market. One hedge fund made a mouthwatering $20 billion for betting that the poorer home buyers would lose their homes on the one had. On the other, millions were kicked out of their homes, scores committed suicide. More images

The double Christmas for 2021 small players was that for the very first time on such a scale, they turned the guns on the big boys of the stock market. And the big players cried foul as they looked at their own reflection:

"I think it's laughable for the hedge funds to cry foul after they do  this every single day on a daily basis," Belfort said, "Manipulate  stocks, box out the small investor." former stockbroker Jordan Belfort stated 

Other big market investors termed the outcome as market manipulation for which an apt response came from Liberal economist Robert Reich who tweeted:

"So let me get this straight:  Redditors rallying GameStop is market manipulation, but hedge fund  billionaires shorting a stock is just an investment strategy?"

Billionaire Elon Musks, crystalizes what is so structurally wrong about this Neoliberalism setup. On Twitter Musk wrote,

"u can't sell houses u don't own u can't sell cars u don't own but u  *can* sell stock u dont own? this is bs -- shorting is a scam..."

Sobering, this evil outcome of promoting the freedom of choice and action in a private market place had been predicted in 1944 well before Neoliberalism took root by Karl Polanyi:

The freedoms we cherish are ‘byproducts of the same economy that was also responsible for the evil freedoms’, Karl Polanyi, 1944

He ends with a damning prediction.

Under Neoliberalism freedom degenerates into a mere advocacy of free enterprise’, which means ‘the fullness of freedom for those whose income, leisure and security need no enhancing, .. 
But ‘no society is possible in which power and compulsion are absent, nor a world in which force has no function’ 
Then, the only way this liberal utopian vision could be sustained is by force, violence, and authoritarianism. Liberal or neoliberal utopianism is doomed to be frustrated by authoritarianism, or even outright fascism. The good freedoms are lost, the bad ones take over., Karl Polanyi, 1944