Bloomberg Opinion | John Authers | Jan 29, 2021

The trading frenzy surrounding the video-game retailer is a prism for a range of epochal issues.

Libertarianism vs Paternalism

This is an eternal debate. Freedom means the freedom to mess things up. But governments have a responsibility to citizens, and companies have a responsibility to clients, to reduce the risks that the actions of some will harm others. Driving is the most popular analogy. Paternalism demands that manufacturers fit cars with seat-belts, but libertarianism permits people to take the risk of not wearing them.

There is a line to be drawn. Within markets, it is best to set a few simple rules, enforce them, and leave everyone as free as possible. That way the invisible hand can work its magic. But if the invisible hand really thinks that GameStop is worth $25 billion, something has gone wrong. The Securities and Exchange Commission is considering what to do, and there is plainly a regulatory issue here. Meanwhile, the decision by Robinhood Markets Inc., the main broker used by the Redditors, not to accept trades in GameStop on Thursday has already prompted class-action lawsuits from clients. For arguments against paternalism, look at the comments below the piece by my colleague Conor Sen arguing that Robinhood did the right thing.

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As day traders are the Davids in this drama, up against hedge-fund Goliaths, their supporters in Congress include progressive Democrats such as Representative Alexandria Ocasio-Cortez, and Senator Elizabeth Warren. The politics will be unpredictable. But a few points seem clear:

• Regulators must respond with equity. Any suggestion that they are defending hedge funds against retail investors would be disastrous. Anything that clamps down on retail trading will have to be balanced by a serious attempt to stamp out “naked shorts” — the practice of selling a stock you don’t have, which led to the imbroglio at GameStop;
• The issue of whether Robinhood and others really engaged in “gamification” — making trading more like a game, and helping to get people addicted to it — needs to be addressed. I think they have a case to answer.
• The need to protect people from losing money they cannot afford to lose should remain paramount. Redditors complain it would be unfair to stop them from taking risks that are allowed for hedge funds. There’s a good reason for this, though. Hedge funds are restricted to wealthy people who can afford losses, while others deserve more protection. I am sure that opinion will make me unpopular.
• There is no libertarian objection to stopping behavior that endangers others. Libertarians can agree that nobody should be allowed to drive a car when drunk. Distorted markets, and particularly asset bubbles, lead to malinvestment and wasted capital, and ultimately to lost jobs. The Federal Reserve is adamant that it cannot and should not attempt to identify and deflate bubbles before they grow too big. Incidents like this suggest that they need to be more active.

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The Future of Shareholder Capitalism

What was intended to be one of the week’s biggest stories disappeared in the vortex of excitement caused by the sub-redditors. Laurence Fink, chief executive officer of BlackRock Inc., the world’s largest fund manager, released the startlingly assertive letter he had sent to the CEOs of every company in which his firm invests. His demands notably included:

Given how central the energy transition will be to every company’s growth prospects, we are asking companies to disclose a plan for how their business model will be compatible with a net zero economy – that is, one where global warming is limited to well below 2ºC, consistent with a global aspiration of net zero greenhouse gas emissions by 2050. We are asking you to disclose how this plan is incorporated into your long-term strategy and reviewed by your board of directors.

BlackRock is trying to come up with a more palatable model for shareholder capitalism, which can guide the economy and society to better long-term outcomes, even if they don’t bring immediate returns. Viewed cynically, this is a public relations effort to make Wall Street look more virtuous; less cynically, it is an attempt to live up to the demands of stewardship.

Not only do BlackRock and other big fund managers need to provide a pension for their clients in retirement, the argument goes; they also need to ensure that they have a world with a breathable atmosphere in which to retire.

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The truth lies between these poles and includes a realization by Fink and others that capitalism is widely seen to be failing, and that they need to do what they can to reform it from within, before having reforms imposed on them.

The Redditors — or at least some of them — also plainly believe that they are part of a democratization of finance that will allow them to help make capitalism fairer. Rather than leave this process to big fund managers using “ESG” investing, their idea is to force a more “just” outcome.

That includes, in the case of some of the companies they are now buying, the notion that it is unfair to starve them of capital. This is in part a well-intentioned attempt to rescue some companies; it sounds much like governments’ old practice of saving lame ducks and picking winners, rather than letting the market ensure that capital doesn’t go where it cannot be well used.

Share ownership is now largely a business for institutional managers using other people’s money, who don’t have the incentives that direct owners would. The new breed of retail investors hope to reform capitalism by returning to direct ownership and breaking the hold of what they see as the corrupt institutions that now control the market. Many seem to delight in the label “anarcho-capitalist.”

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The common thread is, of course, an acceptance that the current model isn’t working. I’m far from convinced that either the BlackRock or the WallStreetBets model is the answer. But the debate over what the new model of capitalism should look like, which should have happened at least a decade ago, can be delayed no longer.

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