The GameStop stock controversy is revealing a fraud of Wall Street and it’s also revealing limitations of capitalism.
The Reddit group that pumped GameStop very closely mirrored a lot of the pump-and-dump schemes that were widespread in cryptocurrency markets from 2015 to 2018, but had mostly become a thing of the past. On the other hand, I think the power of social media and the masses to manipulate a market like this is an important moment that actually bodes well for Bitcoin and other cryptos. Hedge fund manager Anthony Scaramucci agrees:
“The activity in GameStop is more proof of concept that Bitcoin is going to work,” he said. “How are you going to beat that decentralized crowd? That to me is more affirmation about decentralized finance.”
Scaramucci’s comments echo the motivations that gave birth to Bitcoin in the first place: “Satoshi Nakamoto” the mysterious inventor of Bitcoin wanted to find a way to make banks obsolete and stick it to them for all their market manipulations that destroyed the economy while they were all bailed out and mostly stayed insanely rich and avoided any negative consequences, but millions of average Americans lost their life’s savings and their jobs.
Civics Lesson: The Glass-Steagall Act
June 16, 1933. The Glass–Steagall Act effectively separated commercial banking from investment banking and created the Federal DepositInsurance Corporation, among other things. The bill was designed “to provide for the safer and more effective use of the assets of banks, to regulate interbank control, to prevent the undue diversion of funds into speculative operations, and for other purposes.” It was one of the most widely debated legislative initiatives before being signed into law by President Franklin D. Roosevelt in June 1933. The Glass-Steagall Act effectively separated banks and insurance companies and was finally repealed by President Bill Clinton in 1999.
Banks used to be more like utility companies: they would make loans to people they knew or met in person, and then they would take a small fee (the interest rate on the loan) in exchange for the risk they took. And they would back those loans with the assets they held in savings accounts and pay those savers an interest rate. A bank’s profit was the difference between taking a slightly higher rate for loans than what they’d pay in interest to their savers.
Then, investment banks came along, and those bankers used to put up their own money to create the bank’s assets they would use to finance mergers and acquisitions.
To learn what happened after that, watch the movie “The Big Short,” and you will get a view into the exotic financial instruments they created that destroyed the economy in 2008.
What the Reddit group of Robinhood investors revealed is that capitalism has hit a limit, in which it has turned into an unsustainable Ponzi scheme.
The only way capitalism can work is if it has new unexplored land with untapped natural resources to exploit. Once we hit that limit, finance capitalism took off as a way to get around the limitations of limited natural or Human Resources to exploit. Karl Marx clearly saw all of this 170 years ago, and predicted that unregulated free-market capitalism was unsustainable for this reason. I agree with Marx’s diagnosis, but I disagree with his prescription: violent revolution to create a collectivist society with equal outcomes.
Instead, FDR showed there is a middle way that can create a form of capitalism that works for the many, not just the few.
Reagan ended that New Deal economy, and his supply-side revolution led to the massive income inequality based on Wall Street financial shenanigans rather than the Main Street fundamentals that used to make our economy work well for most people.