Saturday, April 03, 2021

1889 Institute: What GameStop can teach us about Good Governance


What GameStop Can Teach Us about Good Governance
by Mike Davis (1889 Institute)

The law doesn’t govern most interactions. Everyone gets in line at the grocer; that’s what we’ve always done. We rely on unwritten rules of fair play, trusting they will be observed. What happens when we rewrite those rules? Escalating rule-changing that makes everybody worse-off. The recent kerfuffle with GameStop is illustrative, and it should serve as a warning to those willing to erode governmental traditions for short term wins.

Robinhood, a website that lets users trade stocks without a per-trade fee, froze its trading of GameStop and other highly-volatile stocks. The everyman Robinhood traders were locked out, while elites still had access through traditional hedge funds. Outrage was swift, and Robinhood reversed its decision.

But these actions didn’t happen in a vacuum: GameStop was volatile because of a targeted attack– a short squeeze. Many hedge funds were short-selling GameStop and other stocks that have been hit hard by lockdowns. Short selling, in very simple terms, is a bet that the price of a stock will go down. If it does, the short-seller makes money. If it goes up, they lose money. A group of Robinhood traders bought shares of GameStop, driving up the price. Hedge funds lost billions of dollars. Traditional brokerages seemingly have a justifiable bone to pick. But do they?

Hedge funds have changed the rules so they can profit off of a company’s downfall. Stock portfolios used to represent true investments - a desire to grant capital by buying into promising companies, in return for a share of the eventual profits. Now they resemble casino chips. Short-selling, credit default swaps, and other novel instruments are a legal way of betting on the economy. Is the short squeeze a dirty trick, or just part of the game?

What can this teach us about good governance? If you change the rules in your favor, someone will later rewrite them to your detriment. If you pack the Supreme Court, the other side will repack it when they’re in power. If you nuke the filibuster for lower courts, the other side will eliminate it for SCOTUS. If they do that, will you gut the filibuster altogether? The left screams about Merrick Garland; the right points to Robert Bork. But Senate rejections of Supreme Court nominees date all the way back to George Washington’s failed nomination of John Rutledge.

Institutions matter. Damaging them for short term gains will hurt everyone in the long run. Unwritten rules govern a shocking amount of our lives, even within government. If you break these rules for your own profit, expect that someone else will break them to hurt you down the road. Don’t short-sell your integrity.

Mike Davis is a Research Fellow at 1889 Institute. He can be reached at mdavis@1889institute.org. The opinions expressed in this blog are those of the author, and do not necessarily reflect the official position of 1889 Institute.

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