Pumps and Dumps and Chumps

Please, stop falling for fake

populism.
Paul Krugman

The New York Times

 Pumps and Dumps and Chumps

Please, stop falling for fake populism.

In a more reasonable world, hardly anyone would care about the ups and

downs of a smallish retailer’s stock price. Even near the top of its Reddit-fueled

roller coaster, GameStop accounted for only about 0.06 percent of the total

value of U.S. stocks. Furthermore, the stock market itself is mainly a sideshow

to the real economy.But we don’t live in a reasonable world, we live in a world

where the GameStop story briefly commanded global attention. And the

craziness did offer some important lessons — not so much about economics and

markets as about psychology and politics.For it turns out that despite four years

of Donald Trump, our society remains remarkably gullible. And it is not just

members of the public who believe what they see on social media; far too many

influential people still keep falling for fake populism.The story so far: GameStop

is a chain of stores selling video games and other electronic goods. With the rise

of online gaming the company’s underlying business has been in gradual

decline. Recently some hedge funds, which believed that this decline wasn’t fully

reflected in its stock price, began selling the stock short — that is, borrowing

stocks and selling them, expecting to buy the stocks back at lower prices.

In fact, GameStop surged so much that the short-sellers were forced to fold their
cards. The rising stock price meant that they were losing money, and to limit
their losses they had to unwind their positions — which meant buying the stock
back, which sent its price even higher.

That was last week. This week GameStop’s stock price has come mostly,
although not entirely, back down to earth. And now, instead of reading about
little guys who suddenly became rich, we’re reading about small investors who
bought near the top and lost their life savings.
So what was all that about? Social media acted as an accelerant, but the basic
story of what happened is a very old one. This was basically a pump and dump,
with a side order of predatory trading.
A pump and dump takes place when an investor or group of investors buy a
stock cheaply, then drive its price up by spreading rumors and/or
misinformation, letting them unload their shares on naïve chumps — “bag
holders” — at a profit. In principle that’s an illegal practice, but it’s unlikely that
anyone will end up being charged in the GameStop affair, since it will probably
be impossible to prove intent.

Still, the stock did in fact get pumped — we don’t know who exactly pushed
GameStop, but many WallStreetBets posts are reportedly coming from bots, not
actual human beings — and somebody made a lot of money selling it to bag
holders.

Predatory trading is wheeling and dealing that exploits the limited financial
resources of other traders, forcing them to unwind their positions and reinforce
price moves. We normally think of hedge funds as the predators in such
situations; the most famous example may be George Soros’s play against the
British pound in 1992. But last week some of the hedge funds were the prey.

All in all, it’s a nasty story with no obvious good guys. Who’s going to shed tears
for short-sellers? But it’s also, in financial terms, small potatoes. What’s
distressing about the GameStop saga isn’t the fact that some people lost money;
it is, as I said, the continuing gullibility these events exposed.

Let’s be clear: What just happened was not a populist uprising. Our economy has
left many families behind, but what working Americans need is an end to wage
stagnation, not the opportunity to gamble on stocks. Indeed, when the dust
settles we’ll probably find out that small investors as a group lost money in the
trading frenzy, while Wall Street gained.

But the narrative of little guys taking on The System surely sucked in some
unwary victims. And things turned really ugly once GameStop stock began its
inevitable descent.

When the trading platform Robinhood temporarily stopped accepting orders for
some volatile stocks because it didn’t have enough cash to support the trades,
far too many public figures immediately claimed conspiracy. It’s no surprise
that Senator Josh Hawley, arguably America’s leading fake populist and a fist-
pumping promoter of the election lies that led to the sacking of the
Capitol, joined in. But some progressives echoed the complaint.

They should have known better. There was always an obvious QAnonish tinge to
the meme stock phenomenon, and it has gotten ever stronger as those stocks
sink; yes, there are people on Reddit and other social media assigning all the
blame to Jewish bankers.
So let me make a plea to everyone who cares about the inequalities of our
society: It’s fine to support populism, but make sure that the populism is real.
We need serious policies to make American lives better, not conspiracy
theorizing and phony culture wars against “elites.”