Stop the game – I want to get off!

‘Hedging’ used to be a way of reducing the risk of selling or buying.  Farmers waiting for their harvest to come in are uncertain about what price per bushel they will get at the market: will they get a price that makes them a profit and a living for next year or will they be made destitute?  To reduce that risk, hedge companies offer to buy the harvest in advance at a fixed price.  The farmer is guaranteed a price and income whatever the price per bushel at the time of going to market.  The hedge fund takes the risk that it can make a profit by buying the harvest at a price below the eventual market price.  In this way, ‘hedging’ can smooth out the volatility in prices, often very high in agricultural and mineral sectors.

But in financial markets, hedging and hedge funds take on a whole new function.  It has become a game, with billions of other people’s money at stake, turning the market for goods and services into a casino for financial betting.  In my previous post, I explained how what Marx and Engels called ‘fictitious capital’ (stocks and bonds) and their supposed value bore little relation to the real value of underlying earnings and assets of companies.

Financial hedging takes this one step even further away from real values, as hedge funds do not just buy or sell stocks rather than invest in productive capital. Now they bet on which way the price of any stock will go. In ‘short selling’, a hedge fund borrows shares in a company from other investors (for a fee) and sells the shares on the market at, for example, $10 each.  Then it waits until they fall to $5 and then buys them back. The borrowed shares are returned to the original owner and the hedge fund pockets a profit.

Far from smoothing price changes, by betting on prices falling or rising, the hedge funds actually thrive on increased volatility.  ‘Going long’ to drive up the price and ‘going short’ to drive down the price is the name of the game.  And in doing so, ‘short sellers’ can actually drive companies into bankruptcy, with the loss of jobs and incomes for thousands.

In the year of COVID, while the ‘real economy’ collapsed, those with cash to spare and looking for a return (banks, pension funds, rich individuals) invested heavily in the stock market, often using borrowed money (at near zero rates of interest).  And these big investors put much of their money into hedge funds and look to these so-called ‘smart people’ to make them a buck.  And they have been doing so, big time.

But also in the year of the COVID, there were millions of people who have been working at home or have been furloughed sitting on savings that they cannot spend because of lockdowns and no travel.  So many have linked up through social networks like Reddit to bet on the stock market.

These small investors have recently started to combine and build up some firepower and to take on the big institutions in their gambling dens.  Since the beginning of the year, a group of amateur traders, organised on Reddit, have been playing the market against major hedge funds, who had shorted shares for GameStop: a US-based video game retailer.  This company had suffered badly during the year of the COVID and was expected to go bust.  Hedge funds piled in to ‘short’ the stock.

But the small traders did the opposite and used their firepower to drive up the stock price, forcing the hedge funds, backed by the big banks and institutions, to buy back the shares at higher prices as the time ran out for their ‘short’ bets (they are fixed time contracts).  As a result, several ‘shorting’ hedge funds took a huge loss ($13bn) and one fund had to be bailed out by its investors to the tune of $2.75 billion.

Wall Street is furious.  The small investors have ‘rigged’ the market, they cry, threatening the value of your pension funds and putting banks in jeopardy.  This is nonsense, of course.  What it actually shows is that financial markets are ‘rigged’ by the big boys and it’s small investors who are usually the ones that get ‘shafted’ and swindled in this gambling den. As Marx said, the financial system “develops the motive of capitalist production”, namely “enrichment by exploitation of others’ labour, into the purest and most colossal system of gambling and swindling and restricts even more the already small number of exploiters of social wealth” (Marx 1981: 572).

Of course, in the current battle, the small investor will lose out in the end.  Massachusetts state regulator William Galvin has already called on the New York Stock Exchange to suspend GameStop for 30 days to allow a cooling-off period. “This isn’t investing, this is gambling,” he said.  No sweat! And already, small investors are seeing a hike in the charges and limits on their trades by brokers and market makers (the casino owners) to deter them from trading.  And there is talk at the top of ‘regulating’ the market to stop investors ‘ganging up’ on the ‘legitimate’ institutions of Wall Street.  The price of GameStop is now falling back.

For working people all these shenanigans may appear irrelevant.  After all, most working households have little or no shares at all.  The top 1% of households owned 53% of  US stock market wealth, with the top 10% owning 93%.  The bottom 90% own only 7%.  However, workers’ pensions and retirement accounts (if workers have them) are invested by private pension fund managers into financial assets (after deducting very nice commissions).  So what savings working households do have are vulnerable to the gambling activities of the swindlers in the financial casino – as the global financial crash of 2007-8 showed.

What this little story of GameStop shows is that company and personal pension funds run by the ‘smart people’ are really a rip-off for working people. What is needed are state funded pensions not subject to the volatility of the financial game.  The big hedge funds have been burnt in this latest skirmish by some small investors and they want to get these minions out of the game.  What working people should want is to stop this game altogether.

12 thoughts on “Stop the game – I want to get off!

  1. I find amazing how finance seems to have an endless army of apologists. Coincidentally, I read the wiki on short-selling not too long ago. I found fascinating that defenders of the practice claim it counters undue bullishness (Baupost Group’s Seth Klarman) and even depict short-sellers as clever sleuths who sniff corporate skulduggery and use short-selling to expose it to the public (Warren Buffett).

    This is no small deal, by the way. I remember watching a couple of episodes of Devils, a 2020 TV series that dramatised the 2008 stock crash, in which the protagonist shorted a company as a way to uncover its corruption. It’s almost as if financial gambling were depicted as a virtuous form of optimising the market, and this makes into the current mindset via this kind of pop culture depiction.

    The wiki also claims studies show short-selling bans don’t curtail volatility, and also mention “research short-sellers”, as if the activity had an academic air to it, using the market to probe into the healthy of companies. Unfortunately, I’m not qualified to delve into the papers cited to judge their soundness.

    1. Dr.Roberts’s book on Engels has already been published, and I got one from Lulu (-https://www.lulu.com/en/us/shop/michael-roberts/engels-200/paperback/product-y9pzdr.html?page=1&pageSize=4 )

  2. Hi Michael,

    Yours is a really good good analysis of the financial markets. Can you provide the source for the % breakdown of stock owners. Does the 90% figure include pension funds?

    Regards,

    Ben

  3. “Of course, in the current battle, the small investor will lose out in the end. Massachusetts state regulator William Galvin has already called on the New York Stock Exchange to suspend GameStop for 30 days to allow a cooling-off period. “This isn’t investing, this is gambling,” he said. No sweat! And already, small investors are seeing a hike in the charges and limits on their trades by brokers and market makers (the casino owners) to deter them from trading. And there is talk at the top of ‘regulating’ the market to stop investors ‘ganging up’ on the ‘legitimate’ institutions of Wall Street. The price of GameStop is now falling back.”

    This isn’t all of it though.
    You probably didn’t know this at the time of research/writing, but there is already a class action lawsuit against the Robinhood app for market manipulation.

    Several politicians have shown support(AOC) and the SEC already said they will “investigate”.
    There is certainly going to be some collateral damage to the Capitalist class beyond the financial losses, even if relatively small compared to the price they’d have to pay if they let the whole thing continue without doing anything.

      1. It’s because most on the Left are idealists and the idea of the ‘small guy’ getting one over the Big Guy appeals to many on the left,a bit like ‘Natural Justice’. But it does show just how fixed (crooked) capitalism truly is and surely it’s the job of the left to use these events to reveal the rotten underbelly of neoliberalism.

  4. Thank-you for clearing this issue up. I shared it on Facebook and Twitter.

    I wonder whether you’ve gone into the issue of the historical relationship between real wages and the real prices of the collective product of labour, specifically from say 1964-the present. If you or some source you know of has, I wonder whether you could provide a link or links. I’ve tried, but failed. I suspect that real wages have not advanced much at all since the mid-60s and may have even declined with because of automation and the consequent redundancy of much of the skilled work force, whereas, real prices for many goods and services may also have declined because of increased productivity or been inflated, due to political manipulation of supply and demand by the various capitalist class ruled governments. That’s probably too much to ask, but maybe there is some study more focused on just the U.S.A. and/or Australia where I live.

    Again, thanks for your blog.

  5. Market goes up, billionaires win. Market goes down, billionaires win again! This is a very interesting kind of gamble. What is unfortunate is they are playing this game with the retirement savings of the working class. These savings are being plundered by the rich with imposement of the private pension system (BES) here in Turkey. This is a really sad situation of affairs and only thing which can change it is nationalization and putting an end to this system of unbridled exploitation of masses.

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