When a trading ‘rabble’ hit financial markets in late January with retail investors putting a squeeze on the industry’s squeeze of GameShop, financial journalists were furious after years of pretending Wall Street had things to tell us. The upset by Main Street ruined the secrets of multi-billionaires, who are scandalised that the mere public uses financiers’ tricks. These were invented long back – around the 1870s – when firms dispensed with actual owners and made ownership ‘limited’ by securitising ‘shares’ and giving management ‘limited’ liabilities. Governments did this well before, parcelling their debts into ‘bonds’, and creating markets in these alleged products. All would be fine, they all said, this stuff could be bought and sold in markets. Having just witnessed the 1929 crash, the American jurists Berle and Means pointed out stockholders do not own the corporation but just the right to sell parcels of stock and argued trading did not improve the firm’s activity.
Given the year-long mess on Wall St since Covid, I prefer the dim view of a financier friend’s insult. Fish, however, at least seek a sensible purpose. Financial markets have nothing to do with economic activity, except negatively, and are even less in touch than punters at horse races, knowledgeable about the cruelties used on voiceless animals.
The dot com futility years ago showed that Wall Street traders were pushing comical internet stock, claiming that it meant a ‘new economy’, but it was in fact worse than the old rapacious one. Trading activity is centuries old and can sabotage people’s lives when a crash creates a Depression. What is their set-up then?
Forty years ago, loud-mouthed ‘finance economists’ dusted off crazed schemes to stoke the wealth of those who live on unearned income, the rentier class, and the profits of banks and ‘near’ banks. They extolled all markets and argued they are ‘efficient’, but only in the limited sense that no-one can out guess or beat ‘the market’. This proclaimed efficiency incorrectly conflated Darwinian natural selection, which allegedly would weed out those who failed to maximise exploitable patterns using the tools of arbitrage. These mysticisms increase with various claims that financial markets never ‘crash’, because there are no ‘bubbles’.
That conflated the profound difference between ordinary markets in goods and services, with financial markets. One can haggle for a price in small markets, or a medieval fair. Milk prices may change from lived experience like a drought or a buyer-switch to Soy milk. But commentators pretend financial markets make ‘realistic’ valuations, when there’s no association whatever to experiences in goods and services markets.
In financial markets, everyone must simultaneously be a seller and buyer of claims to future income. How can mere claims be assessed? The sociologist-economist André Orléan argues, rightly, the liberty to sell relies on a collective undertaking in a market (not lone individuals) to hold each security over a long term. Fears for liquidity (saleability) are mollified by all being both buyers and sellers. Yet when ‘too many’ buyers or sellers build up from copy-cat mimicry there’s either a bubble or a crash.
Many, far better informed theoretically than ‘finance economists’, argue this collective ‘mimetic desire’ (as Orléan termed it) for liquidity can fragment. Traders might copy favourable moves towards buyers, which boosts a price mark-up say in housing assets and to a bubble (rare with milk). Conversely, more may turn to selling until no-one can squeeze out the door fast enough. This is the Gamblers’ Curse – precisely when does one cut one’s losses. No one can say, and so, traders search for ‘The News’, Keynes argued. The key News is not world-shaking (Covid hardly gained attention) but only whatever the last second’s trading market News is: everything is guesses of bets on guesses. Neither a bubble nor collapse, then, has many links with Finance Economists’ alleged ‘real economy’ (except debt).
These economists often distinguish Main Street ‘dumb’ traders from ‘smart’ traders, when that distinction is untenable. Their fond idea is dumb traders rely on gossip and ‘diffusion’ of rumours (The News!), whereas smart traders can predict the future from the ‘fundamentals’. These ‘predictions’ are just algorithms of past trades on past stock, not ‘the future’, and is boosted by The News, and also by a favourable political climate of top end tax cuts and low wages. Moreover, the future is even less stable than in regulated systems. Today, no past stock (such as coal sales) can magically ‘reveal’ the future climate catastrophe in its many forms; nor did a stable situation exist after health ‘care’ was increasingly privatised and, in the name of profit, precautionary measures like quarantine clinics were abolished despite recent pandemics.
It is not only that shorting or going long in stock is irrelevant to economic activity, whereas the huge finance sector increases inequality daily, garnering fabulous riches to itself via speculation. It’s also that the size of lending for speculative bubbles and crashes can expand so dangerously as to stop economic life. Savvy politicians saw the joke here, like US Congresswoman Alexandria Ocasio-Cortez:
‘Gotta admit it’s really something to see Wall Streeters with a long history of treating our economy as a casino, complain about a message board of posters also treating the market as a casino.’
A thorough depression descends only when banks and near banks are lending heavily, but not on socially useful, lasting projects with solid returns. Bankers – Hyman Minsky famously said – are ‘merchants of debt’. They have expanded into wealth management and are again able to mix their speculative trades with their plain vanilla mortgages, while avoiding their liabilities to depositors because all deposits are at call.
Banks are now so vast and create most of the money we use, and when they are recklessly over-extended governments are forced to bail them out, via taxpayers. These conglomerates and also shadow banks, which create totally unregulated ‘near money’, indulge in creating new tricks and cons, grandly called innovations; these all rely on caveat emptor – blame the buyer ‘fine-print’ trick. This pretends modest buyers are gullible but unlike a used car, buyers cannot investigate banks’ books for faulty brakes.
The financial markets make use of lending in ways few know today. Traders borrow via margin call loans for buying stocks or currencies. When the hope is that the asset will increase in value, traders are ‘going long’ (more sensibly this can happen without loans). ‘Shorts’ are selling assets that traders do not own, on the bet that they can buy them back at a lower price. If either ‘future’ is not met, bank lenders call in these margin loans the fastest.
In the case of Main Street traders merely aping these repellent tricks and collectivised via a ‘Reddit’ platform, Main Street went long on an asset that Wall Street hedge funds were busy shorting. Wall Street losses were about $5BN, by January 30, 2021, and their efforts are thrown at retrieving losses. Some Main Streeters won by getting out the door fast: apparently a 10-year-old gained a lot while others sold ‘too late’. Some argued they just wanted to disrupt Wall Street. Whereas previously, ‘mum and dad’ traders were apparently ‘dumb’, these upstarts were trendy, just like Wall Streeters. Hedge funds complain that the Robinhood and Redditt platforms infringe the law on collusion between traders, but what is a hedge fund other than the collectivization of capital for the purpose of share ramping and other destabilizing tricks?
These are the dreary tactics. No one can predict if lending is dangerously high, or if a silly bubble (they all are) is about to fizzle out. There used to be controls which vanished under President Nixon and his co-conspirator, Federal Reserve Chair Arthur Burns. One control, strongly activated under President F. D. Roosevelt, was to jack up margin loan requirements. Only the US Fed can adjust these loan calls, and pre-WWII, the margin requirement became 98 percent: thus, stopping such loans. In the 1929 crash, the Fed had tried to raise the margin, but banks were outraged, soon after calling in margin loans and speeding bankruptcies leading to depression. Thomas Palley wants margin controls extended to Asset-Based Reserve Requirements, that is, on more than stock assets, and this control measure be taken up by all central banks.
Raising the top tax rate (US Senator Elizabeth Warren’s plan) also slows this dangerous trading. Whereas finance economists only look at inflation and not debt-deflation, if they really looked, the fact is wage inflation is near-zero and consumer demand has long dropped, but not assets. If debts are not serviced, repossession and bankruptcies amass. The real cost of debts increases and can produce debt-deflation. This is only profitable to lenders and rentiers; if economic activity is already weak, and few can buy this expensive debt (of distressed debts), we experience a wholesale Depression. Treasuries can spend on fruitful job creating projects, but rarely do. US Treasurer Janet Yellen and Biden’s stimulus programme are firmly aimed to ward off debt deflation, via inducing mild inflation, whereas conservative finance ministries across the world appease the rentier through austerity, to the detriment of the citizen. When central banks raise their Rates, debt values rise further, the mess is liquidated, producing ‘destruction without function’.
Main Streeters only show what can be far more effectively done by central banks, which are able to bat against bond vigilantes and bubbles with vast money-chests, being self-financing. Only once (to my knowledge) have the G7 central banks fought currency traders who were going long on the Yen and would have destroyed Japanese economic activity after the 2011 Tsunami hit. These Seven went short, to ensure the Yen was cheaper for recovery. Traders made huge losses.
Ultimately, traders give no information about anything useful. Main Streeters also aimed for profits and revealed the repulsive tricks that Wall Street. deploys to destroy opportunities for people’s lives. I haven’t even mentioned High Frequency Trading, the computers of which are designed to garner (illicit) insider-led trading. Banks are high priests of mysticisms worshipped by finance economics. What is needed is the return of democratic controls exercised through parliaments over finance and banking. Markets live for the moment and favour amnesia, but it is worth recalling that democratic control was labelled ‘financial repression’ and it was destroyed decades ago by the ‘oppressed’ rabble of millionaires and soon to be billionaires.
- Adolf Berle and Gardiner Means (1932) The modern corporation and private property, Macmillan, New York.
- See in particular Andre Orleans (2021) Empire of Value, second edition, MIT.
- Tweeted on 27 January 2021 and widely retweeted and cited.
- See for example Thomas Palley (2014) ‘Monetary policy after quantitative easing: The case for asset based reserve requirements (ABRR)’, Economics for Democratic and Open Society’,9 April, http://thomaspalley.com/?p=416