Speaker 1: Pushkin from Pushkin Industries. This is Deep Background, the show
Speaker 1: where we explore the stories behind the stories in the news.
Speaker 1: I'm Noah Feldman. This is still the beginning of our
Speaker 1: new season here on Deep Background, and we've been talking
Speaker 1: about the Trump transition, the impeachment trial, and of course
Speaker 1: the ongoing pandemic. This week, though, another story emerged from
Speaker 1: out of the blue, a story sufficiently interesting and unexpected
Speaker 1: that we decided we shouldn't ignore it, in particular because
Speaker 1: this year we're focused on the theme of power. By now,
Speaker 1: pretty much all of you must have heard about last
Speaker 1: week's run on game Stop stock, a short squeeze that
Speaker 1: began around a Reddit group called Wall Street Bets. Within
Speaker 1: ten days, the game Stop stock gained more than ten
Speaker 1: times its value, causing billions and losses to hedge funds
Speaker 1: who had short at the stock, raising the stock to
Speaker 1: a point where almost inevitably it will have to come
Speaker 1: down very substantial because the markets teetered for a moment.
Speaker 1: This became a lead story around the world, and it's
Speaker 1: a strange story. The odd issue on which it appears.
Speaker 1: Both Alexandrio Casio Cortez and Donald Trump Junior seemed to
Speaker 1: be on the same side. Here to speak to us
Speaker 1: today and make sense of this complex and fascinating topic
Speaker 1: is Alexis Goldstein, a former Wall Street pro who now
Speaker 1: works as a senior policy analyst at Americans for Financial Reform.
Speaker 1: She writes the popular newsletter Markets Weekly. I asked her
Speaker 1: to begin by giving us a little summary of the
Speaker 1: game Stop craziness before turning to the question of what
Speaker 1: it means for the allocation of power in markets in
Speaker 1: Polity and beyond. Alexis, thank you so much for joining me.
Speaker 1: Maybe we could start by my just asking you, for
Speaker 1: purposes of the general listener, what happened specifically with respect
Speaker 1: to the Game Stop stock last week. So there has
Speaker 1: been a real increase in what we call retail trading
Speaker 1: since the pandemic. So retail trading just refers to non
Speaker 1: Wall Street people. Maybe it's you, maybe it's me, Maybe
Speaker 1: it's our friends using some kind of online brokerage like
Speaker 1: e Trade, like Fidelity, like Interactive Brokers, and more recently
Speaker 1: like robin Hood just to trade, you know, as a
Speaker 1: non professional. So there has been this really big surge
Speaker 1: in retail trading since the pandemic. Maybe you know, part
Speaker 1: of that is because people are at home. And there's
Speaker 1: also been this growth in the popularity of a particular
Speaker 1: selb breddit called Wall Street Bets that is focused on
Speaker 1: basically gambling in my opinion on the stock market and picking,
Speaker 1: you know, hot stocks to bet four or against. And
Speaker 1: there was one particular person on that subreddit who really
Speaker 1: thought that game Stop was a goodbye and have been
Speaker 1: talking about it for a while. And I guess the
Speaker 1: popularity of that as a position grew and grew, and
Speaker 1: then it was sort of compounded by the fact that
Speaker 1: this reddit forum was looking at the list of stocks
Speaker 1: that are most frequently shorted. So a short is when
Speaker 1: you are betting that the stock price will fall, and
Speaker 1: the way that that is operationalized is you borrow the
Speaker 1: stock from somebody who owns it. They lend it to you,
Speaker 1: You immediately sell it, and then you sit tight and
Speaker 1: hopefully you don't worry too much and wait for the
Speaker 1: stock to drop, and if it drops, you can buy
Speaker 1: it back at a cheaper price, return it to the
Speaker 1: person who loaned it to You give a little bit
Speaker 1: of interest on the loan of the stock, and you
Speaker 1: make a nice profit. That's how it's supposed to work.
Speaker 1: So they were looking at this list of all of
Speaker 1: these stocks that were very frequently shorted, and GameStop was
Speaker 1: one of them, and they decided to manufacture what is
Speaker 1: called a short squeeze. And a short squeeze is essentially,
Speaker 1: if I'm short a stock and I don't want to
Speaker 1: give it up yet, and it starts to move against me,
Speaker 1: and it starts to rise above where I sold at,
Speaker 1: and it rises and rise and rises. The person that
Speaker 1: lends me the stock isn't just going to be like
Speaker 1: chill and normal and wait for me to turn a
Speaker 1: profit again. They're gonna demand some cash because they're worried
Speaker 1: I'm going to blow up and I won't be able
Speaker 1: to perhaps return the stocks to them because I won't
Speaker 1: have any money left. And that's what's called a margin call.
Speaker 1: And so a short squeeze is kind of like when
Speaker 1: collectively all of these shorts start to have their positions
Speaker 1: move against them, the lenders of the stock to them
Speaker 1: demand some money, right, they make a margin call on
Speaker 1: all of them, and then they have a choice. They
Speaker 1: either have to close out the position at a huge loss,
Speaker 1: or they have to sell a bunch of other stuff
Speaker 1: in order to put up some money so that they
Speaker 1: can keep going in hope maybe this position will move
Speaker 1: against them. So these folks on Reddit basically decided collectively,
Speaker 1: all together they were going to try and manufacture a
Speaker 1: short squeeze on game Stop by a bunch of retail
Speaker 1: traders all buying games Stopped together at the same time,
Speaker 1: and they did so. That was a great setup. And
Speaker 1: collective is actually a fascinating word here, because although all
Speaker 1: the people on Reddit in some sense acted collectively to
Speaker 1: do this together, none of them was looking over the
Speaker 1: other's shoulder in such a way that they could actually
Speaker 1: judge whether they were really doing it. But as it happens,
Speaker 1: they really did do it. And once they started doing that,
Speaker 1: the price of game Stop stock started going up, which
Speaker 1: it would have gone up in any case if a
Speaker 1: lot of people were trying to buy it, and then
Speaker 1: that in turn led the short sellers to have to
Speaker 1: buy more of the stock, which also drove the price up,
Speaker 1: and by the end of the process the stock was
Speaker 1: at a remarkably huge multiple of its prior value, right right.
Speaker 1: And it's sort of compounded by the fact that a
Speaker 1: lot of the folks using robin Hood and all Reddit
Speaker 1: are also buying options. So an option gives you the right,
Speaker 1: but not the obligation, to purchase or sell a hundred
Speaker 1: shares of a stock at some point in the future
Speaker 1: for a set price. But the person that you typically
Speaker 1: buy an option from is a market maker who does
Speaker 1: what's called hedges their position by buying the stock. Right,
Speaker 1: if I'm selling you, Noah, an option that lets you
Speaker 1: buy something from me in the future, I need to
Speaker 1: have that hundred shares of stocks to give to you,
Speaker 1: and so typically, if I don't already have it, I'm
Speaker 1: going to go out in the market and buy it.
Speaker 1: So it was even further compounded by the fact that
Speaker 1: there was all of this options activity, which the people
Speaker 1: who sell the options have to hedge by again buying
Speaker 1: the stock. So it was just sort of this confluence
Speaker 1: of things. And then the only other wrinkle that I
Speaker 1: will add to it. And this is just my suspicion, right,
Speaker 1: I don't think we know for sure, but I don't
Speaker 1: think this was just right. I don't think this was
Speaker 1: just retail traders. They were very public about their plans,
Speaker 1: and I suspect that you had a lot of institutional players,
Speaker 1: maybe hedge funds that were also pushing the stock up
Speaker 1: and making their own purchases. We don't know for sure, right,
Speaker 1: but that's my suspicion, And just to clarify less, your
Speaker 1: theory would be that those people were basically or those actors,
Speaker 1: institutional actors were just piggybacking, right. They saw it happening,
Speaker 1: they thought there was some probability that it would work,
Speaker 1: and they said, oh, well, the stock's gonna go up.
Speaker 1: Let's also buy some of the stock earlier on. That
Speaker 1: would have driven the price to stock up as well.
Speaker 1: It's not that those institutional actors would have thought that
Speaker 1: there was quote unquote real value at the higher price point.
Speaker 1: It's just that they saw the squeeze happening and they
Speaker 1: thought they'd want to get in on the fun. Right.
Speaker 1: That's my speculation, right, don't I don't think we know.
Speaker 1: And the other sort of added wrinkle to that is
Speaker 1: there are plenty of players who don't really wait around
Speaker 1: for that, who trade in and out of things very quickly,
Speaker 1: over and over again, over fast time periods that may
Speaker 1: also have been trying to profit off of it as
Speaker 1: it went up because there's some volatility, right, It didn't
Speaker 1: just shoot straight up like sometimes it goes up, it
Speaker 1: goes down at Gozepico scone. So I think it was
Speaker 1: a combination of things. But the short version is I
Speaker 1: suspect while Street had some hand in this as well,
Speaker 1: it wasn't just retail. Yeah, and if it were institutional investors,
Speaker 1: that doesn't just mean human beings of training desks. It
Speaker 1: also means algorithmic training programs that don't care what the
Speaker 1: thing is, but if they see a pattern of rise,
Speaker 1: they might make the prediction and to buy, So that
Speaker 1: could have contributed to it potentially as well. That leaves
Speaker 1: just one last piece of the setup before we start
Speaker 1: turning to the implications. And I just want to hit
Speaker 1: on that because everything you've said so far just sounds
Speaker 1: like it's a potentially happy story. Right, somebody is short
Speaker 1: the stock, the prices go up. Not good for the
Speaker 1: prisoner shorts to stock, but good for everybody else. The
Speaker 1: stock goes up and up and up. But there's a downside,
Speaker 1: which is that what goes up in this context almost
Speaker 1: certainly must come down. So explain why the stock has
Speaker 1: come down somewhat since then, and what ultimately, at least
Speaker 1: in the view of most financial professionals, yourself included gives
Speaker 1: us reason to believe the stock will end up way, way,
Speaker 1: way lower than it was at its peak, and in fact,
Speaker 1: maybe not so far from where it was when this
Speaker 1: all started. So my concern, and I think other people's
Speaker 1: concerns here, is that this looks like a bubble, and traditionally,
Speaker 1: when you're in a bubble, the bubble bursts, and one
Speaker 1: of the sort of traditional signs that you are in
Speaker 1: a bubble. I don't know if it's scientific, but like
Speaker 1: at least in the dot com bubble and the pre
Speaker 1: two thousand and eight bubble, when you start to hear
Speaker 1: from people who aren't typically paying attention to the markets
Speaker 1: asking you if they should buy into the markets all
Speaker 1: of a sudden, that's usually the sign that the bubbles
Speaker 1: about to burst. And I don't know about you Know it,
Speaker 1: but I've had a lot of people asking me should
Speaker 1: I buy you know, Nokia or BlackBerry? Right now? Should
Speaker 1: I buy dog coin? There's a lot of interest from
Speaker 1: my friends who are typically not people paying attention to
Speaker 1: the financial markets, which says to me that we may
Speaker 1: be approaching what's called the top right and when the
Speaker 1: bubble burst, the bottom falls out. The prices collapse. And
Speaker 1: the other reason that they that very well might happen
Speaker 1: is GameStop isn't really I don't think that it's underlying
Speaker 1: value justifies its current prices. It's certainly been widely reported
Speaker 1: that there is skepticism about the current valuation of GameStop
Speaker 1: and some of these other names like AMC, right, which
Speaker 1: let's think about what that is. It's movie theaters. We're
Speaker 1: still here in a pandemic. People aren't really going to
Speaker 1: movie theaters that much. Does it really make sense for
Speaker 1: the price of AMC to be surging, And so I
Speaker 1: think that there's a concern that with the media attention,
Speaker 1: it's going to draw in even more people to buy
Speaker 1: these stocks, and some of those people are unfortunately probably
Speaker 1: going to buy at the top and then it will collapse.
Speaker 1: But you know what, like it's hard to predict when
Speaker 1: that will happen, and I don't really have a prediction,
Speaker 1: and I don't I think anyone who tells you when
Speaker 1: it will happen doesn't really know for sure. The high
Speaker 1: public interest is always reminiscent of the probably apocryphal story
Speaker 1: about JP Morgan, whose shoeshine boy supposedly asked him a
Speaker 1: few days before the big stock market crash in October
Speaker 1: of nineteen twenty nine, could he the shoeshine Boy and
Speaker 1: some of his friends buy forty dollars of stock through
Speaker 1: JP Morgan's brokerage firm, And according to the story, JP
Speaker 1: Morgan went back to his office and told everybody, we're
Speaker 1: getting out of our positions. We're going into cash because
Speaker 1: this is not a good situation. And then Morgan looked
Speaker 1: like a genius. Now again, there's there's a good amount
Speaker 1: of apocryphy of that story, but I agree with you
Speaker 1: as a kind of it's a good indicator. And in
Speaker 1: my household, the indicator is my fifteen year old son,
Speaker 1: whose interest both in crypto and in the stock market
Speaker 1: was actively piqued by the recent rise in crypto prices,
Speaker 1: by the game stop short squeeze, and I think by
Speaker 1: the attention among people in his online worlds to these issues.
Speaker 1: So that's a nice proxy as well for when everybody's
Speaker 1: excited and involved, even the teenagers, there's reason in historical terms,
Speaker 1: you think that maybe you're in some kind of a bubble.
Speaker 1: I should add, by the way, that when I pointed
Speaker 1: this out to my son, he made the sophisticated point
Speaker 1: that you were ascribing to the institutional investors, which is,
Speaker 1: of course that's true. But if you know how to
Speaker 1: get in on it on the way up and don't
Speaker 1: stay in it for too long, there's still profits to
Speaker 1: be made. And you know, unfortunately for me, he is
Speaker 1: analytically speaking correct about that problem. The problem is how
Speaker 1: do you know when to get out? So yeah, exactly, exactly. Okay,
Speaker 1: Now let's turn to analysis. And there's been a huge
Speaker 1: amount of analysis just in a few days that this
Speaker 1: has been going on about what is the deeper meaning
Speaker 1: of these events? And I want to talk about a
Speaker 1: bunch of different angles, but let's start with your take,
Speaker 1: which I found particularly valuable, and that was to sum
Speaker 1: it up, I'm using the quote from your piece the
Speaker 1: GameStop madness. Isn't David against Goliath, namely the little guys
Speaker 1: on the subreddit against the hedge funds. It's Goliath against
Speaker 1: goliath with David as a fig leaf. So explain what
Speaker 1: you mean, please, Alexis. So there's a narrative that's taken
Speaker 1: hold that this is a triumph and a disruption of
Speaker 1: our financial system, and that the folks on reddit are
Speaker 1: you know, figuring out how to play Wall Streets game
Speaker 1: and then play it against them and winning. And while
Speaker 1: I don't dispute that they are absolutely using techniques that
Speaker 1: Wall Street firms use, right like the short squeeze is
Speaker 1: not an invention of Reddit. It is something that I
Speaker 1: think hedge funds try to do to other hedge funds
Speaker 1: all the time. I don't think that this is going
Speaker 1: to topple the financial system, and in fact, I believe
Speaker 1: and I don't have a crystal ball, but I would
Speaker 1: predict that when we see the first quarter earnings of
Speaker 1: the major Wall Street banks that are typically the best
Speaker 1: in terms of trading operations, that they're going to have
Speaker 1: extremely profitable first quarters. And the reason that I'm guessing
Speaker 1: that is because I used to work on the technology
Speaker 1: team with the equity derivatives trading desks at Mary Lynch
Speaker 1: and then later at Deutsche Bank, and their most profitable
Speaker 1: days by far, like the day that they made the
Speaker 1: most money of the whole year, was the days when
Speaker 1: prices were going crazy and there was tons of what's
Speaker 1: called volatility, which is just kind of like you know,
Speaker 1: price moving going up and down, and unpredictable action in
Speaker 1: the markets. That was their favorite kind of day, right,
Speaker 1: And I don't think that Goldman Sachs and Morgan Stanley's
Speaker 1: they're called flow trading desks, but they basically sort of
Speaker 1: sit there as intermediaries between buyers and sellers. It's maybe
Speaker 1: hedge funds, it could be insurance companies. It's all these
Speaker 1: big institutional players that want to trade. Sometimes they don't
Speaker 1: even want to trade on in an exchange. They want
Speaker 1: to trade what's called over the counter, which is this
Speaker 1: sort of market that is between Wall Street itself, totally
Speaker 1: unavailable to retail traders, totally unavailable to these people on
Speaker 1: writing you cannot trade over the counter through robin Hood.
Speaker 1: You know, they have sophisticated risk management tools. They have
Speaker 1: sophisticated trading software. They manage their risk. I worked with
Speaker 1: the options trading desk, and so they had they had
Speaker 1: a lot of really fancy risk management software, and they
Speaker 1: knew how to hedge their orders and so they didn't
Speaker 1: really care if the price went up or down because
Speaker 1: they were hedged. And hedge just means like you have
Speaker 1: some sort of risk management strategy in place so that
Speaker 1: whatever the price does, you're not going to lose too
Speaker 1: much money. You also won't make too much money, but
Speaker 1: you're going to be okay, and they make money on volume.
Speaker 1: So I suspect that the big titans on Wall Street
Speaker 1: are doing quite fine, and if anything, this whole mania
Speaker 1: is probably making them a ton of money. That's sort
Speaker 1: of my one piece. The second piece is, so let's
Speaker 1: move off the more traditional Wall Street and look at
Speaker 1: hedge funds. So Wall Street that's the the subreddit that
Speaker 1: has been in the news a lot cheered the collapse
Speaker 1: of Melvin Capital, which was a hedge fund that was
Speaker 1: betting against Game Stop and fell victim to the short squeeze.
Speaker 1: They were rescued by two hedge funds. One of them
Speaker 1: is Citadel LLC, which is run by a billionaire named
Speaker 1: Ken Griffin out of Chicago, and the other is Point
Speaker 1: seventy two, which is the new fund of Steve Cohen,
Speaker 1: who he's also the New York Mets owner, so people
Speaker 1: may know him from that. But his old fund sac
Speaker 1: plaged guilty in twenty thirteen to insider trading and had
Speaker 1: to shut down. So why am I bringing this up.
Speaker 1: I'm bringing this up because one hedge fund blows up,
Speaker 1: other hedge funds rescue it. Now they get to have
Speaker 1: a revenue sharing agreement with Melvin Capital in the future
Speaker 1: that's probably going to be profitable for them, right. So
Speaker 1: I just don't really think that the Goliaths are suffering.
Speaker 1: And I do think that some of the David's are
Speaker 1: going to get rich and have gotten rich, but I
Speaker 1: just don't think that that means that we're going to
Speaker 1: have a fundamental shift in the way that the system works.
Speaker 1: If anything, I think it might make a lot of
Speaker 1: the goliath a lot more rich. Let me press on
Speaker 1: your critique of the narrative, and let me be clear,
Speaker 1: I couldn't agree with you more that the big institutional
Speaker 1: players will be fine, and that the hedge fund industry
Speaker 1: will be fine. And what's more, even that you know
Speaker 1: Melvin Capital and Gabriel Plotkin, who is the extremely well
Speaker 1: thought of person who runs the fun will be he
Speaker 1: will be just fine. He probably is just fine. But
Speaker 1: I want to ask about what's really going on behind
Speaker 1: the David versus Goliath narrative. I mean, just focusing on
Speaker 1: this one episode in which a small number of people
Speaker 1: who were not for the most part, it seems professional
Speaker 1: investors were able to achieve something on their own as
Speaker 1: it were, and that seemed to me to have a
Speaker 1: kind of symbolic effect, you know, the perception that Wall
Speaker 1: Street wealth is something that's only available to the very
Speaker 1: well healed seemed to east in a moment be broken
Speaker 1: and there in that sense, it seemed to be a
Speaker 1: kind of populism associated with the moment, not unlike the
Speaker 1: populism of the Donald Trump movement. And that narrative seems
Speaker 1: to have some legs to it. Even if everything you
Speaker 1: say is true, as I believe that it is, let
Speaker 1: me ask you about the kind of populous side of
Speaker 1: the narrative. I mean, look, yes, is this a triumph
Speaker 1: of financial literacy and education and people learning perhaps more
Speaker 1: about options than they may have previously planned. Yes? And
Speaker 1: is this an interesting way to try and move markets
Speaker 1: and is it going to be a way that other
Speaker 1: people will try to move markets in the future. Yes?
Speaker 1: And are there people that are making astonishing amounts of
Speaker 1: money right now? Yes? Yes, all of that is yes.
Speaker 1: But look, let's think about the moment that we're in.
Speaker 1: We're in a moment of extreme inequality that's getting worse.
Speaker 1: We have millions of people unemployed, We have over four
Speaker 1: hundred thousand dead from the coronavirus. And I think speculation
Speaker 1: is an incredibly alluring thing right now in the absence
Speaker 1: of larger government support for our people, which I would
Speaker 1: point out is perhaps an aberration here in the United
Speaker 1: States when you compare us to some of the other
Speaker 1: countries in the world. And so, yes, it perhaps is
Speaker 1: a feel good story, and it's going to be a
Speaker 1: really great tangible material benefit to the people that happen
Speaker 1: to get into game stop in time. But I am
Speaker 1: more concerned with, you know, what do we actually do
Speaker 1: to make sure that everybody is okay? And I don't
Speaker 1: think that using Wall Street's own tools against Wall Street
Speaker 1: is the right way to lift all boats here, because
Speaker 1: Wall Street is, let's remember, at the end of the day,
Speaker 1: a zero sum game, and so when you have winners,
Speaker 1: you are also going to have losers. And who are
Speaker 1: those losers? And what happened when there was the short squeeze?
Speaker 1: Right when there was the short squeeze, the hedge ones
Speaker 1: had to sell some of their assets in order to
Speaker 1: pay the margin call or to close out their position,
Speaker 1: and the rest of the stock market went down. And
Speaker 1: there are people who have pensions, and there are people
Speaker 1: who have for k is. And look, let's I always
Speaker 1: like to remind people plenty of people have absolutely no
Speaker 1: exposure to the stock market whatsoever. Forty seven percent of
Speaker 1: America has absolutely no dog in the Wall Street, you know,
Speaker 1: in the stock market. They don't have a pension fund,
Speaker 1: they don't have a four O one K, they don't
Speaker 1: have an IRA, they don't have stocks, they have nothing. Right, So, yes,
Speaker 1: this is a really interesting collective moment, but it's not
Speaker 1: helping people across the board. And That's what I'm interested in.
Speaker 1: And I think that's what I am concerned about, is
Speaker 1: people claiming victory that is bigger than perhaps the victory
Speaker 1: actually is. And I would also point out that when
Speaker 1: Wall Street itself talks about what is the solution to poverty,
Speaker 1: sometimes they say it's financial literacy. We just need to
Speaker 1: educate people about how they can invest in Wall Street? Right,
Speaker 1: how can you open an IRA? How can you be
Speaker 1: a smart investor? And I don't think that that is
Speaker 1: the right way to make sure that everybody has enough,
Speaker 1: you know, at the end of their lifetime or in
Speaker 1: order to retire, right, I think the answer is public polity,
Speaker 1: see like Social Security and other programs like that. So
Speaker 1: I'm just a little concerned that the triumph here mirrors
Speaker 1: a little too closely what Wall Street itself holds out
Speaker 1: as the solution for things like poverty. We'll be right back.
Speaker 1: I entirely agree with you that mere education isn't enough.
Speaker 1: I mean the fact that the people you're describing who
Speaker 1: have nothing in the stock market the most fundamental level,
Speaker 1: they are not able to participate in the processes of capitalism,
Speaker 1: and any wealth creation that happens in the markets leaves
Speaker 1: them frankly out, and education is not enough. But surely
Speaker 1: education plus a steak would actually be a help. Well,
Speaker 1: I would agree with that, but only if we give
Speaker 1: them a stake, and right now we don't. Right, So,
Speaker 1: if we're combining this idea that let's educate everyone about
Speaker 1: how stocks work, with baby bonds or some program that's
Speaker 1: actually giving people an investment, some capital that they can
Speaker 1: actually invest, then I would agree. But that's not what
Speaker 1: we have, right we have if you just pull yourself
Speaker 1: up by your bootstraps, somehow managed to save money when
Speaker 1: most people don't have, you know, whatever, it is two
Speaker 1: hundred dollars to cover an emergency expense, and maybe you
Speaker 1: put two hundred bucks on game stock and you get
Speaker 1: really lucky. Like, that's just not a solution in my
Speaker 1: mind to the like structural inequalities of society. Oh, I
Speaker 1: totally agree that it's not a solution. I'm wondering, though,
Speaker 1: if you think that events like this that draw public
Speaker 1: attention to the markets in a way that potentially draws
Speaker 1: people in might actually play some role in the long
Speaker 1: run in shifting policymakers in the direction of baby bonds
Speaker 1: or other mechanisms to attempt to broaden the capacities of
Speaker 1: ordinary people to participate in the rise of capital. Yes,
Speaker 1: And I would even sort of add to that pitch
Speaker 1: of yours to say, you know, some people like this volatility,
Speaker 1: some people don't. But if you don't like this volatility
Speaker 1: and you don't like rank speculation, like a good way
Speaker 1: to do that is just to make sure everybody isn't
Speaker 1: so desperate for ways to pay their rent or choosing
Speaker 1: between food and medicine. Which to say that I think
Speaker 1: that people who are are trading on robin hood, I
Speaker 1: don't think that they are, but I think some people
Speaker 1: who are will right because they just it looks like
Speaker 1: a way to get rich quick and That's what I
Speaker 1: worry about, is people investing money that they can't afford
Speaker 1: to lose losing it. I think the problem here is
Speaker 1: we have, you know, decades of systemic racism and discrimination
Speaker 1: that have led to unequal outcomes of wealth in this country.
Speaker 1: And the way to fix that is not to democratize
Speaker 1: the casino. The way to fix that is to make
Speaker 1: it so that the house doesn't always win. And unfortunately, historically,
Speaker 1: right like Wall Street is a driver of speculation. In
Speaker 1: two thousand and eight, many of the banks went into
Speaker 1: black and brown neighborhoods and tried to convince you know,
Speaker 1: black homeowners who own their homes out right to take
Speaker 1: out you know, cash out refinances, you know, And they
Speaker 1: exploited the fact that wages have been stagnant for a
Speaker 1: really long time and people needed money. Right The Department
Speaker 1: of Justice found that Wells Fargo, you know, you know,
Speaker 1: gave black borrowers with the same credit scores and the
Speaker 1: same incomes prime loans when they gave white borrowers with
Speaker 1: the same credit and income scores better loans and better terms.
Speaker 1: I think we need to be thinking about, like who
Speaker 1: has power here and how are they wielding that power,
Speaker 1: and historically financial forces have been trying as best they can,
Speaker 1: basically to rent seek and to get as much money
Speaker 1: as they can, especially out of people who can least
Speaker 1: afford to get rid of it. I'm highly sympathetic to
Speaker 1: the answer you give at the broadest level, and in fact,
Speaker 1: this year one of the themes of our podcast is
Speaker 1: to think seriously about power and how it's allocated and
Speaker 1: where it lives. And for sure, economic power does not
Speaker 1: live in the poorest people or the dispossessed people, and
Speaker 1: in the United States, those people are disproportionately black and Latino,
Speaker 1: and so totally in agreement with you, I do think
Speaker 1: that when we're talking about something like the symbolic meaning
Speaker 1: of what's just been happening, though, it's hard to avoid
Speaker 1: the realization that the reason that a lot of these
Speaker 1: investors online think that the hedge funds are the bad
Speaker 1: guys is that they are not investors in hedge funds,
Speaker 1: and it cannot be investors in hedge funds. That's part
Speaker 1: of this David and Goliath narrative. And it might be
Speaker 1: that some degree of regulatory shift would have the effect
Speaker 1: of changing that aspect of the narrative. I agree though
Speaker 1: with you that in some sense that's a side show
Speaker 1: when you compare it to the more underlying questions of
Speaker 1: economic or inequality in the United States. Let me turn
Speaker 1: to a second question, which is about consequences for the
Speaker 1: market as a whole. So one of the reactions that
Speaker 1: some commentators have made just in the few days that
Speaker 1: this has been going on is to raise the question
Speaker 1: of whether the markets generally might be made vulnerable by
Speaker 1: the volatility introduced by things like the game stop or
Speaker 1: the AMC short squeezes. I've heard other people who are
Speaker 1: sophisticating the markets say, look, there's nothing to worry about here,
Speaker 1: It's a small blip. It will all be fine. Where
Speaker 1: do you come down on that question? Because with respect
Speaker 1: to the people who our ordinary investors, who are not
Speaker 1: trying to do stock picking and whose modest life savings
Speaker 1: are in the market, we do have an interest in
Speaker 1: managing the volatility and especially in managing long term decline.
Speaker 1: So I am concerned about future of volatility in the market,
Speaker 1: but I am not concerned about it because of this
Speaker 1: game stop situation. I think game stop is a symptom,
Speaker 1: not a cause. And if you were to ask me
Speaker 1: for a cause. I would point you back to last spring,
Speaker 1: when you know, in the midst of the pandemic, the
Speaker 1: bond market started to seize up and credit spreads started
Speaker 1: to rise because people were very concerned about corporate defaults,
Speaker 1: and the you know, the Federal Reserve, which is the
Speaker 1: largest central bank in the world, did something it never
Speaker 1: did before, which is it said that it was now
Speaker 1: going to buy the debt, the corporate debt of companies,
Speaker 1: including what are called fallen angels, which are companies that
Speaker 1: were previously rated as investment grade, which are seen as safe,
Speaker 1: but had fallen into junk grade. And so if they
Speaker 1: had fallen to junk grade after a certain period in March,
Speaker 1: the FED was still able to purchase their debt and
Speaker 1: Wall Street I think the reaction was the FED will
Speaker 1: just backstop us, and if they need to, they will
Speaker 1: not only buy corporate debt and junk bonds, they will
Speaker 1: buy equities. And so I think that, combined with the
Speaker 1: fact that investing in the fixed income markets and buy
Speaker 1: fixed income I mean things like bonds was no longer
Speaker 1: as profitable as it used to be, it drove a
Speaker 1: lot of large institutional players into the equities markets and
Speaker 1: it overheated the equities markets. Now, somebody asked Chairman Powell,
Speaker 1: Drome Powell, the Federal Reserve chair, about this last week,
Speaker 1: and he said, no, no, no no, I don't think that
Speaker 1: that's what's happening. I don't think that the Fed caused
Speaker 1: any kind of overheating. I disagree, and I think that
Speaker 1: it also exacerbated inequality because again, to go back to
Speaker 1: this conversation about hedge funds, the people that are the
Speaker 1: predominant investors in corporate debt, especially junk bonds, are hedge funds.
Speaker 1: And there's an even added wrinkle. If people remember, the
Speaker 1: price of oil went negative. The oil futures went negative
Speaker 1: last year because there was such low demand, and oil
Speaker 1: futures are traded with what's called physical delivery. You have
Speaker 1: to actually physically receive barrels and barrels of oil. If
Speaker 1: you happen to have a futures contract on oil that
Speaker 1: expires and then you know it's profitable, you have to
Speaker 1: receive the oil. And so there was just sort of
Speaker 1: crunch where they had run out of space and no
Speaker 1: one had any space to store the oil, and so
Speaker 1: people were just so desperate to get rid of their
Speaker 1: oil futures contracts that they gave them away. Why do
Speaker 1: I bring that up Because the Federal Reserve bought over
Speaker 1: a billion dollars to date in fossil fuel in fossil
Speaker 1: fuel firms, corporate bonds, utility companies, or energy companies, and
Speaker 1: so I think that the FENS has a role here
Speaker 1: in making the market overheated, and I think in making
Speaker 1: equity asset valuations go perhaps higher than they should have, again,
Speaker 1: because you had large investors who were doing what is
Speaker 1: called seeking alpha or yield and trying to find profits
Speaker 1: where there were no longer profits to be had in
Speaker 1: the fixed income markets. And I worry about a bubble,
Speaker 1: not because of Game Stop, which I think is quite
Speaker 1: obviously a bubble, but a larger equity bubble overall that
Speaker 1: might have been aggravated by public policy. And that's the
Speaker 1: kind of thing that I worry about. I should just
Speaker 1: say for listeners who are truly faithful listeners, they may
Speaker 1: remember that very shortly after that happened in March, the
Speaker 1: credit market and version that you're describing, we actually had
Speaker 1: on a very well known credit traitor, BoA's Weinstein, who
Speaker 1: was raising alarm about that before it had become a
Speaker 1: big national story, so the most faithful listeners will remember
Speaker 1: our discussion of that. Let me ask you a follow
Speaker 1: up question, though, alexis I mean you began by saying, yes,
Speaker 1: you're worried about volatility. Then you pointed to a series
Speaker 1: of actions taking by the FED, all of which were
Speaker 1: designed to manage volatility. And then you said, if I
Speaker 1: understood you correctly, that you're concerned that those actions taken
Speaker 1: by the FED to manage volatility may be creating overheated
Speaker 1: equities prices such that maybe the stock market itself is
Speaker 1: a bit of a bubble. So if I understood you correctly,
Speaker 1: you know what's the fix there. So my solution is
Speaker 1: actually in the Cares Act, but was not used by
Speaker 1: the FED. Congress suggested that the FED create a series
Speaker 1: of facilities, including a mid sized lending facility that the
Speaker 1: Fed Reserve Act has, you know this section called thirteen three.
Speaker 1: It's their emergency lending facility. They're allowed to create broad
Speaker 1: based support programs. So they did not happen to use
Speaker 1: the new authority that Congress gave it. They just sort
Speaker 1: of did something they could do without Congress. In the
Speaker 1: Cares Act, there was a series of conditions that Congress
Speaker 1: was suggesting that the FED take that included things like
Speaker 1: prohibiting stock buybacks and prohibiting dividends and ensuring that workers
Speaker 1: were not laid off or workers who were laid off
Speaker 1: were rehired, and the FED neglected to include any of
Speaker 1: these conditions in their corporate debt buying. And I think
Speaker 1: you cannot just rescue the bond market without any conditions
Speaker 1: on the companies to ensure that workers are protected and
Speaker 1: to ensure that the companies themselves do not overheat the
Speaker 1: equity markets. The FED did not use the authority in cares.
Speaker 1: I think that you could have done a blended approach.
Speaker 1: You could have rescued the bond market, but you could
Speaker 1: have added these conditions to ensure that you aren't also
Speaker 1: overheating the equity market. And some of those conditions would
Speaker 1: have been, Look, don't spend your money on buying back
Speaker 1: your stock later in the future, spend it on your workers,
Speaker 1: rehire people, and make sure that you aren't doing the
Speaker 1: same old, unfortunate financialization trend that we've been doing for
Speaker 1: so very long, where you know, CEOs at the top
Speaker 1: of companies have real incentives to drive up the price
Speaker 1: of their own stock. Right, This is part of the narrative.
Speaker 1: I think that's right. Right. The Reddit folks and the
Speaker 1: robin Hood folks have discovered that while Street does try
Speaker 1: to drive up the price of stocks, it just usually
Speaker 1: happens at an individual company level. Right. A CEO gets
Speaker 1: paid often based on the performance of the company and
Speaker 1: the performance of the stock, and so they have a
Speaker 1: real incentive to see their stock price go up. And
Speaker 1: one way you can do that is buying back your
Speaker 1: own stock. So I think that the answer is it
Speaker 1: would have been to use some of those conditions that
Speaker 1: Congress suggested that the Fed use that they didn't use
Speaker 1: to make sure that you didn't just go from rescuing
Speaker 1: the bond market to then juicing the equities market. Coming
Speaker 1: back to the narrative of David and Goliath in the
Speaker 1: question of where the power lies, it's an irony if
Speaker 1: what you're saying is right, it's an irony that the
Speaker 1: so called David's or the self described David's in the
Speaker 1: GameStop situation, we're doing exactly what the CEO of game
Speaker 1: Stop would presentally be very happy to see them doing, namely,
Speaker 1: increasing the value of the stock right. I mean, everyone
Speaker 1: who's in the market wants it to stay up. And
Speaker 1: it may be that the broadening of ownership of stock
Speaker 1: through people's retirement accounts has created a shift in the
Speaker 1: political economy of the country. And this is just a
Speaker 1: very general hypothesis, but a shift in the political economy
Speaker 1: of the country where the politician's favoritism and the Fed's
Speaker 1: favoritism to the markets isn't just driven by let's help
Speaker 1: rich people. It's also driven by a concern or a
Speaker 1: worry for ordinary people who own stocks. And then we
Speaker 1: get into situation where it's where the political process is
Speaker 1: basically captured by the interests of the markets, not necessarily
Speaker 1: because it's captured by the very rich, but because it's
Speaker 1: captured by the interests of everybody who holds stocks. And
Speaker 1: that's not only the rich. And in that sense, all
Speaker 1: of the Davids are aligned with the goliaths in wanting
Speaker 1: not all the Davids, but many of the Davids are
Speaker 1: aligned with the goliaths in wanting the stock market to
Speaker 1: stay high. And then we get various governmental policies that
Speaker 1: effectively protect the market. And if that's the case, I
Speaker 1: guess my question for you, is is that a very
Speaker 1: bad thing from the standpoint of the distribution of political
Speaker 1: economic power, that is, of the relationship between the people
Speaker 1: who own the stocks, which excludes some percentage of Americans
Speaker 1: but includes a large percentage of others, and the other
Speaker 1: people who are running our politics. I think yes. The
Speaker 1: short answer is yes. And then we have to step
Speaker 1: back and say why is that? And the answer that
Speaker 1: that is true is because we have had financialization where
Speaker 1: the only way that you can invest right now is
Speaker 1: with Wall Street. You don't have a public option for
Speaker 1: investing unless you are a very wealthy person who can
Speaker 1: buy municipal bonds. This wasn't always the case, right, and
Speaker 1: it doesn't have to be this way, and we don't
Speaker 1: have to just you know, finance our own wealth through
Speaker 1: private financial intermediaries. This was a public policy choice, right.
Speaker 1: This was the move away from pensions towards things like
Speaker 1: iras and private investment accounts, which again Wall Street gets
Speaker 1: to take a little fee every time you use those.
Speaker 1: This was a policy decision. If you go back to
Speaker 1: the New Deal, there was an entity called the Reconstruction
Speaker 1: Finance Corporation that was larger than all of the Wall
Speaker 1: Street banks put together at the time, and they directed
Speaker 1: huge amounts to public investment to projects large and small.
Speaker 1: And there's a very interesting paper where if anybody wants
Speaker 1: to think about, like what might be an alternative vision
Speaker 1: for how this would work by an academic named sale
Speaker 1: Omarova who is out of Princeton, called the National Investment Authority,
Speaker 1: and the idea is to sort of invert the private
Speaker 1: public partnership. So instead of public goods being sold to
Speaker 1: private entities like happened in Chicago, right they sold off
Speaker 1: their parking meters to private interests like happens on toll roads.
Speaker 1: We solicit private investment into a new kind of security
Speaker 1: that would be backed by the full faith and credit
Speaker 1: of the government, but we direct our investments into public goods,
Speaker 1: and then you would essentially have not only a way
Speaker 1: to finance projects that Wall Street will never fund because
Speaker 1: Wall Street wants things that they can profit off of
Speaker 1: in this lifetime. Right, They're never going to finance something
Speaker 1: that you can't profit off of in a single lifetime,
Speaker 1: let alone, usually something you can't profit off of in
Speaker 1: a year. We need to find ways to use the
Speaker 1: instrument of government to fund public projects, and this could
Speaker 1: be a financing mechanism for things like the Green New Deal.
Speaker 1: So like, yes, do I think that you are right?
Speaker 1: Do I think that all of the incentives are aligned
Speaker 1: so that we all in a way if we do
Speaker 1: participate in the stock market, which again, to repeat myself,
Speaker 1: forty seven percent of people absolutely do not. Yes, we
Speaker 1: all sort of have this collective interest in the stock
Speaker 1: market staying up. But I don't think that's a good thing.
Speaker 1: And I think we have to ask the question about
Speaker 1: how we got there and why that is, because AA
Speaker 1: doesn't have to be that way, and be there was
Speaker 1: a series of policy decisions to push it such that
Speaker 1: it was that way, so that if you wanted to
Speaker 1: save for your future, there was no way for you
Speaker 1: to do it without going through Wall Street again, unless
Speaker 1: you're rich enough to pursue these kinds of municipal bonds
Speaker 1: or other investments. And I think that that's a mistake
Speaker 1: and that's the wrong way to structure a society, and
Speaker 1: we don't have to do it that way, and I
Speaker 1: think we should seriously ask ourselves, like, how do we
Speaker 1: remake our society so we don't rely on Wall Street
Speaker 1: just to fund our own retirement. A last question about
Speaker 1: takeaways and popular impulse. And this is something that you
Speaker 1: mentioned you're the top of the interview, and I'm just
Speaker 1: going to come back to it very briefly now at
Speaker 1: the end, and that is that a lot of creativity
Speaker 1: seems to be going into the idea of not having
Speaker 1: to rely entirely on Wall Street. But that creativity seems
Speaker 1: typically not to go to the kinds of long term
Speaker 1: public investment that you're talking about, but rather to the
Speaker 1: world of crypto where one of the animating you will
Speaker 1: call it an ideal if you're a crypto activist, or
Speaker 1: you'll call it a fantasy if you're a crypto skeptic,
Speaker 1: is to get outside of governmental structures and to offer
Speaker 1: opportunities for investment for individuals that in the long run
Speaker 1: can gain in value and provide assurance without falling into,
Speaker 1: as it were, the arms of the big Wall Street investors,
Speaker 1: especially in connection with what's sometimes called the gamification of trading.
Speaker 1: And I think people mean two things by that. They
Speaker 1: mean that trading is more like a video game than
Speaker 1: it used to be on a place like robin Hood
Speaker 1: or on coin base. They also mean that trading as
Speaker 1: a form of gambling in the sense of gaming is
Speaker 1: as gambling. So I think the original white paper for
Speaker 1: bitcoin was very interesting and had a very noble goal.
Speaker 1: I think the blockchain technology that drives a lot of
Speaker 1: cryptocurrencies is very highly applicable for a lot of interesting solutions,
Speaker 1: and I think the intention behind cryptocurrency was quite good, right,
Speaker 1: and it can be used for lots of various things,
Speaker 1: including let's say you live in a government that is
Speaker 1: oppressive for some reason and is trying to limit your
Speaker 1: ability to send money to your family in a different
Speaker 1: country or something like that. Right, Like, there's a lot
Speaker 1: of potential for public good with cryptocurrencies, but unfortunately, I
Speaker 1: think what has happened with cryptocurrencies is what happens to
Speaker 1: a lot of things, which is that you know, because
Speaker 1: Wall Street has this large concentration of power and ability
Speaker 1: to move things, and I by Wall Street. I would
Speaker 1: even broaden it out to say fintech and venture capital firms,
Speaker 1: you know, they've commodified it like anything else. And I
Speaker 1: think we cannot look, you know, look think about this
Speaker 1: and ask about this without thinking. So you mentioned coinbase.
Speaker 1: The former a former executive of Coinbase was just the
Speaker 1: acting director of the office, a controller of the currency
Speaker 1: one of the most important banking regulators in the United
Speaker 1: States under the Trump administration and proceeded to do all
Speaker 1: of this deregulation and allow banks to participate in cryptocurrencies
Speaker 1: in ways that they were not allowed to before. Right,
Speaker 1: Like we it's sort of like you can't escape you here,
Speaker 1: somebody created a thing precisely to escape the sort of
Speaker 1: finance system, and the finance system has found a way
Speaker 1: to profit off of it through all of these different
Speaker 1: you know, various apps and companies, and then you had
Speaker 1: all this deregulations under Trump, and that has sort of
Speaker 1: like brought in cryptocurrency into the banking sector, you know.
Speaker 1: And do I think that hedge funds are betting on crypto? Absolutely,
Speaker 1: they're betting on crypto, right like, I'm sure they are.
Speaker 1: They would be silly probably at this point not to
Speaker 1: But I just think that it's one of those things
Speaker 1: that I don't know that I'm in favor or against.
Speaker 1: I just think we need to think closely about how
Speaker 1: it needs to be regulated, because it is, at the
Speaker 1: end of the day, a currency, and it is something
Speaker 1: that we shouldn't allow to operate in regulatory blind spots.
Speaker 1: And that's the same way that I feel about hedge funds,
Speaker 1: and the same way I feel about a lot of things,
Speaker 1: is like all of this takes robust oversight and regulation,
Speaker 1: and in the wake of the Trump administration, we absolutely
Speaker 1: do not have that. We have the opposite of that
Speaker 1: right now. Alexis, thank you for your fascinating analysis and
Speaker 1: for talking to me about power and how it's distributed
Speaker 1: and the world of finance. The old line goes that
Speaker 1: you can't beat city hall. It's a lot harder to
Speaker 1: beat Wall Street than it is to beat city hall.
Speaker 1: But for that we need to begin with a clearide
Speaker 1: account of who has the power and what that power's
Speaker 1: relationship is to politics and to finance itself. So thank
Speaker 1: you for helping us on that path. Well, thank you
Speaker 1: for having me. Listening to Alexis Goldstein brings home what
Speaker 1: seemed to me some truths and some possibilities with respect
Speaker 1: to how we think about markets and power. I am
Speaker 1: very compelled by her observation that although this may feel
Speaker 1: in certain respects like a David and Goliath story, in
Speaker 1: fact the Goliaths are doing just fine. Some David's may
Speaker 1: have made some money, a lot of other David's will
Speaker 1: probably end up losing money. It is, after all, a
Speaker 1: zero sum game, and the goliaths will live to fight
Speaker 1: another day. Put another way, Goliath isn't dead, in which
Speaker 1: case it's not that much of a David and Goliath
Speaker 1: story after all. Yet at the same time, Alexis points
Speaker 1: out that at a moment where a narrative of populism
Speaker 1: is powerful in the markets, we might want to think
Speaker 1: seriously about where power is in fact allocated. It's great
Speaker 1: that so many Americans participate in the markets if it
Speaker 1: makes them better off, but she points out forty seven
Speaker 1: percent of the population has no skin in the game,
Speaker 1: has no stake in what the markets do, and therefore
Speaker 1: does not benefit from policies designed at the national level,
Speaker 1: including in the Federal Reserve, to keep the markets steady.
Speaker 1: What's more, their unintended consequences of policies designed to keep
Speaker 1: the markets from being too volatile, including the possibility that
Speaker 1: effectively the government using taxpayer dollars ends up ensuring big
Speaker 1: risk taking investors against downside risk, thereby artificially inflating the
Speaker 1: markets and potentially creating the possibility of greater losses going forward, indeed,
Speaker 1: of facilitating bubbles at the level of power analysis. My
Speaker 1: biggest takeaway from talking to Alexis is that this isn't
Speaker 1: really a story about a single stock. It's really a
Speaker 1: story about the aspirations of many ordinary Americans to feel
Speaker 1: as though they are not shut out of the possibility
Speaker 1: of building wealth, in this instance building wealth by speculation,
Speaker 1: but in any case doing the building in some way
Speaker 1: or another. On that account, it's not just greed that
Speaker 1: drives Wall Street or greed that drives the people who
Speaker 1: want to be like Wall Street. It's a deeper question
Speaker 1: of where the power genuinely lies, and the rhetoric that
Speaker 1: drives people to make investments like the investments that lead
Speaker 1: to the game Stop Short Squeeze, may go beyond the
Speaker 1: mere desire to make money and stand at a symbolic
Speaker 1: level for the desire to be involved in the game
Speaker 1: and to be in the action where money is being made.
Speaker 1: That is a story that we will continue to watch
Speaker 1: throughout this year as we look at the question of power,
Speaker 1: and it's a question that will remain salient in our
Speaker 1: minds as we discuss going forward the way Corporation's work
Speaker 1: and the way they interact with Wall Street in our economy.
Speaker 1: When I come back to you next week, we will
Speaker 1: be in the heart of an impeachment trial, and I
Speaker 1: promise to talk to you about that. Until then, be careful,
Speaker 1: be safe, and be well. Deep Background is brought to
Speaker 1: you by Pushkin Industries. Our producer is Mo laboord, our
Speaker 1: engineer is Martin Gonzalez, and our shorerunner is Sophie Crane mckibbon.
Speaker 1: Editorial support from noahm Osband. Theme music by Luis Guerra
Speaker 1: at Pushkin. Thanks to Mia Lobell, Julia Barton, Lydia, Jean Coott,
Speaker 1: Heather Faine, Carl Vigliori, Maggie Taylor, Eric Sander, and Jacob Weisberg.
Speaker 1: You can find me on Twitter at Noah R. Feldman.
Speaker 1: I also write a column for Bloomberg Opinion, which you
Speaker 1: can find at Bloomberg dot com slash Feldman. To discover
Speaker 1: Bloomberg's original slate of podcasts, go to Bloomberg dot com
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Speaker 1: please write a review or Ello frad. This is Deep Background.