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GameStop and the fragility of the American economy

GameStop and the fragility of the American economy

GameStop and the fragility of the American economy
February 11
11:00 2021

If you are intimidated or overwhelmed with all the news about stock trading and the sudden resurrection of GameStop (stock name “GME”), you are not alone. American economics is a maze that can easily be seen as needlessly complex or convoluted no matter how you look at it. To truly know what is going on, we need to know the practice of shorting and why it’s so controversial.

Shorting a stock is when an investor borrows a stock and immediately sells it at its current price. Hoping for the stock price to fall, the investor will then buy the stock back at a lower price and return the borrowed stock to the broker while also netting the difference in value. A notorious financial practice, it has long been the subject of debate regarding its legal and ethical validity.

In the case of GameStop, a redditor on the “wallstreetbets” subreddit made a thread alerting that a hedge fund called Melvin Capital had bought a large number of short trades against the struggling company. Almost everyone went to purchase as much GameStop stock as they could, causing a 400 percent increase in value and further causing Melvin Capital to lose more than $3 billion.

To stop the bleeding, the hedge fund closed their short positions and were forced to buy the stock back, now priced much higher than before which increased the price of the stock. This financial snowball effect, known as a “short squeeze,” has once again elicited debate over how ethical shorting really is. The difference this time around is who are the ones crying foul.

To see hedge fund investors clutch their pearls over this is laughable yet completely unsurprising. One can’t help but remember the cartoonish and sickening sight of Wall Street bankers overlooking a group of Occupy Wall Street demonstrators and condescendingly raising their champagne glasses to those chanting “We are the 99 percent! The people, united, will never be defeated!” It’s such moments that show how the rich view the poor, lacking any self-awareness on how they made their money in the first place. Seeing this unfold is American ingenuity writ large: people banding together to enact their own brand of change, much to the chagrin of gatekeeping economists.

The U.S. financial system is far from perfect. The usual issues such as gender disparity, unemployment and healthcare costs continue to cripple struggling families, all during a pandemic that continues to wreak havoc. The events surrounding GameStop, not to mention the equally unlikely AMC and Blackberry, granted a brief glimmer of hope to long time cynics of the stock trade. It wasn’t long ago where shorting practices acted as the impetus for the 2008 housing crisis, the worst American economic recession since The Great Depression.

Seeing investment apps like Robinhood actively restrict their users from buying GME stock or deactivate their account is too ironic to make up.  For an app to have such a namesake and do what they’re doing is either the antithesis of American capitalism or the epitome of free-market hypocrisy.

One also needs to note how quickly the mainstream news cycle moved away from covering the whole ordeal. It was the online talk of the town over a weekend, flooding entire social media feeds and quickly fizzled out once the GME stock dropped 34 percent on Feb. 1. The American news cycle is an ongoing, ever-evolving entity that has no regard for retrospection. And rightfully so: covering current events leaves no room to dwell on the past unless the story demands it.

Only time will tell if this investment fiasco holds much weight in the distant or immediate future. The immediate impact has captured the excitement and terror of American economists, depending where they stand on the issue. Will this encourage laymen to get into investing and have a serious go at it? Who knows if Wall Street will start restricting the act of shorting because it caused financial turmoil of their own.

It shows the fragility and ease of manipulation of the American economy, and it has uncovered the hypocrisy of those who inhabit it. Fragile egos crying foul when outsiders or common folk are simply doing what investors have been doing for ages. Enacting restrictions on stock trading and investing will only highlight the elitist entitlement that has plagued the free-market capitalist ideal for decades.

Featured Illustration by Miranda Thomas

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Kevin Diaz

Kevin Diaz

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