Robinhood, Reddit, and the Cram Down of Economic Populism

Short sellers claim there is a moral and economic worth to their trade. They supposedly keep the market honest by exposing overvalued stocks, thereby preventing “irrational exhuberance” from creating stock bubbles.

If that was all there was to it, they’d be right. Stock bubbles tend to eventually pop, and when they do, worst case, the collateral they represent implodes, the loans that the collateral enabled go into default, and trillions in debt fueled liquidity is erased in a cascading downward spiral. And just like that, the economy collapses into a deflationary depression that makes the 1930s look like a cake walk. There are good reasons we don’t want to demonize short sellers indiscriminately, or drive them out of the market.

What’s happening with Robinhood and the Reddit mob, however, exposes the gritty reality behind the high-minded justifications for short-selling. Yes, short-sellers play a vital role in regulating stock market levels. But the world of short-selling is an elite club, rife with intrigue and shady players and deliberate market manipulation. And when an online mob crashed the party and pissed in the punchbowl, suddenly the bouncers came to life.

This is the point to emphasize: Reddit and Robinhood didn’t do anything that elite Wall Street hedge funds haven’t been doing for years. They just did it publicly, using an online mob of small players, and were indifferent to the impact it would have on elite institutions that have become accustomed to raking billions in profits out of the market. […] Read More