Capitalisn’t: GameStop, Robinhood, and Our Troubling Obsession with Speculation

Matt Stoller: We’ve given up on the ability to stop cheating in the economy. We believe in democratizing finance, which another way of saying that is, everybody should get equal access to cheating, versus the traditional American model of saying, “No, we want to keep speculation to a minimum, so people can focus on business and working for a living and making useful and productive things.”

Bethany: I’m Bethany McLean.

Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?

Luigi: And I’m Luigi Zingales.

Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.

Bethany: And this is Capitalisn’t, a podcast about what is working in capitalism.

Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?

Luigi: And, most importantly, what isn’t.

Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.

Luigi: So, Bethany, are you getting messages about GameStop from all sorts of people?

Bethany: Yes. I’m always surprised when this happens, because it’s the rare business or economic story that really breaks through and becomes a cultural moment. And GameStop for sure did.

Speaker 8: Video game retailer GameStop is set to continue their head-spinning ascent today amid an ongoing battle between bullish day traders and hedge-fund short sellers.

Speaker 9: Think about it. Lots of people were home. They’re on screens. We have our disposable income, and we can’t spend it socializing or going on trips. And from there we saw a whole bunch of people become interested in the markets. Where did they communicate and convene? On these social media platforms. Reddit.

Speaker 10: But then, this morning, something huge happened, and that’s this trading app, Robinhood, just halted anyone’s ability to buy GameStop.

Speaker 11: This looks like a move by an outfit called Robinhood, which is supposed to be taken from the rich and giving to the poor and doing exactly the opposite. That when the big guys, including one of your main investors in your company, started to lose, you shut down the game to starve the little guy. Fair criticism?

Speaker 12: That’s not what it is at all.

Luigi: The fascinating thing about this story is, it is like an artichoke, it has many layers. And, actually, like artichokes, the best part is after you peel all the layers.

Bethany: That’s making me laugh, because artichokes are actually my favorite food in the entire world. But, yes, I think that’s exactly right. And the kind of stories that, to me, do transcend the narrow interest of the business world are the stories that do get at these deeper issues. So, there are all these different threads in the GameStop saga, but this ultimately, I think, is a story about American society and where we are now. And that’s what led us to choose our guest for today.

Luigi: Yeah. Matt Stoller is the head of research at the American Economic Liberties Project and also the author of Goliath: The 100-Year War Between Monopoly Power and Democracy, a book that I strongly recommend.

Bethany: Yep. And Matt had written a piece that highlighted something called the Cantillon Effect. And those of you who speak French in our audience are going to have to forgive me, because I am a classic ugly Midwesterner in my complete inability to pronounce French words. Richard Cantillon was an 18th-century French banker and philosopher. And his basic theory was that whoever benefits when the state is printing a bunch of money is based on the institutional setup of that state. So, back when he wrote his book, what that meant was that the closer you were to the king and the closer you were to the wealthy, the more you benefited. And the further away you were, the more you were harmed.

And the core of this idea is that money isn’t neutral. And so, Matt wrote a really interesting piece on GameStop that saw what happened at GameStop through the lens of what’s known as the Cantillon Effect, which is that we’ve been living in a world since the financial crisis where the Fed has kept interest rates near zero. And that sparked an enormous amount of speculation, but it hasn’t resulted in equal speculation. Because, for the most part, those who are closer to the Federal Reserve, to the source of the funds, have been able to benefit more because of this institutional flow of money. Does that sound like a good description for an economist, Luigi, or is that too much of a journalistic description?

Luigi: Yes, it does, it does. And I have to say that we owe it to Matt to have resurrected that, because the Cantillon Effect is not in the standard micro books. So, I think that it is something that clearly is becoming very relevant, given the policies that central banks have been following the last 10 years or so. And I think it’s very important. And so, with Matt, we’re going to talk about GameStop, the Cantillon Effect, and a lot of other stuff, because with Matt it’s very difficult to keep a conversation to just one topic.

Bethany: Matt, the key line in the piece you wrote, which I loved, is the basic problem that GameStop is revealing in our economy writ large: “As a society, we are increasingly putting our time, energy, capital, and talent we could use to build fun or useful things into gambling or acquiring market power.” You see the GameStop episode through this lens of a broader societal issue. And so many people are doing, I’d say, micro pieces saying, “It’s the little guys against the big guys,” “It’s David versus Goliath,” or, “It’s the way the market can be gamed,” or, “Let’s investigate Robinhood." And there is this larger systemic issue behind it, right?

Matt Stoller: Well, I think every line in my piece is brilliant. So, there’s this traditional populist framework, pro-business, pro-justice, American framework that doesn’t really sit comfortably on the right or the left. It’s sort of the yeoman farmer thing from Thomas Jefferson, which kind of got updated to be the middle class and so on and so forth, that the enemy of business, agriculture, and labor is finance and monopoly. We don’t like the middlemen. We don’t like the monopolists, right? This goes back to the Middle Ages. Producerism. So, you roll that forward to the 1980s, 1990s, 2000s, and there’s this kind of shift away from the idea that the producer, the businessperson, the worker, the farmer, should have the fruits of their labor, towards a kind of different social-justice framework, which you can look at as consumerism or democratizing finance, right?

The idea that everybody should have access to this speculative frenzy or get cheap stuff. This is a political shift in the way that we think about our society. And so, GameStop, the political argument behind the Reddit types is that the market is rigged and we’re rigging it back. And their basic political argument is right. There are a lot of middlemen and hedge funds and various others that are doing sleazy things to steal money. And when they lose, they get bailed out. I am a little offended when people call it a casino, because casinos are regulated. Whether GameStop itself represents the little guy versus the big guy is less important than the political argument that they’re making.

But what they’re also saying is that we’ve given up on the ability to stop cheating in the economy. We believe in democratizing finance, which another way of saying that is, everybody should get equal access to cheating. Everybody should get equal access to the speculative fervor versus the traditional American model of saying, “No, we want to keep speculation to a minimum so people can focus on business and working for a living and making useful and productive things.”

I mean, one other thing I wrote in that Cantillon Effect piece on GameStop is, a friend of mine on Wall Street called me up. And he’s like, “Did you know that there’s a bubble in basketball trading cards?” And then I started hearing there’s a bubble in comic books. There’s all of this sort of strange behavior that you saw in the 1920s with just weird speculation everywhere. So, something is really off-kilter about our society when all of this money, and this is the Cantillon Effect, it’s like the money is not neutral. It is flowing into channels and it is winding up in these strange speculative bubbles. Elizabeth Warren came out and said, “GameStop has employees, and it has customers. And these are important things to consider. And we have to deal with this speculative froth that could be causing real problems here.”

Elizabeth Warren: We don’t know who’s putting this information out. And here’s the key, market manipulation should be illegal. Manipulating the market should be wrong, right? But the SEC has never even completed its rules defining what market manipulation is. So, that means, in effect, what you’ve got is a casino. And you don’t even know if anything in that casino is honest. You can’t tell who the players are, and there are very few restrictions on what the players can do.

Matt Stoller: And she got just massive pushback, not necessarily in the press but on online, the level of hatred from this kind of Reddit populist types. They were angry that, I think, she was coming in and saying the speculative mania is bad, generally speaking. Because their claim is, let the little guy get in on the speculative mania, let everybody trade and speculate on equal terms, because we don’t believe in the rule of law. We don’t think that anybody can get rid of this cheating and speculation. So, just let us have at it.

And she was actually saying, “Actually, let’s think about GameStop as a part of the economy. Let’s see whether the financial system, these games that you’re playing, are in themselves intrinsically useful or not.” And that is a critique that they were very angry at, because it calls into question the existence of all of this trading in the first place.

What’s really interesting to watch with Wall Street Bets, the site where this came out of, is that these are a lot of really talented and insightful people, just like Wall Street is full of talented and insightful people, who have spent their lives basically playing a video game with money. And that is not real business, it’s not a real economy, it’s not going to solve any real problems, not going to cure any diseases. It’s not going to build anything cool. It’s just a video game for money. And I think that’s the basic dynamic, is why are we having this political argument about the right way to play a video game for money, instead of saying, “Why are we basing our economy on people that are playing a video game for money?” That’s where we dedicate our social resources.

Luigi: Your point is brought a little bit to the extreme, in the sense that, I think there is definitely excessive speculation. There is some element of video games. However, this game, as you call it, has real consequences. The long-term survival of a chain of stores is in the hands of a price. If the stock price of GameStop is high, they can refinance, they can probably weather this COVID period, maybe reliquefy and find a new life. Otherwise, they’re going to go bankrupt, and most likely it’s going to be liquidated, a lot of people could be fired. So, the point at the essence of all of this was a legitimate disagreement about the prospect of this chain of stores. And there were some people that said COVID was the kiss of death for a business model that was already antiquated to begin with, and with COVID it’s becoming unbearable.

Others will say, “No, I think GameStop is a brand, is a lifestyle,” whatever, they have different views. And they think that GameStop has a future. And that is the tension, which is an important tension. And, second, a point that is dear to me, I know that you’re not on that side, but a lot of people hate the short sellers because they think they are all evil. I think that we need more short selling in the market, because those are the ones who keep the market from going crazy. And one of the consequences of the explosion of this is that very few people are going to try to short sell anything in the future, because you can lose your shirt before you’re right.

Bethany: To your first point—

Matt Stoller: I actually totally agree with you on short sellers. I like short sellers. They’re not moral people, but they’re the only countercyclical force in the market. They identify accounting fraud. I’m not saying that GameStop in and of itself is particularly important, and I get the point of valuing financial assets and needing to invest. And in any democracy, you’re going to have a financial system which is going to involve speculation. And speculation, you’re going to have a little bit of froth. People are going to make money, they’re going to lose money. And that’s important, because how do you value capital assets? How do you change a society? The financial system is actually a great way to do that nonviolently. But the problem is, if you have 9 percent of your GDP dedicated to financial profits, which is what Thomas Philippon found, versus 2 percent, which was basically the pre-1980 model, then the middlemen are actually in control of way more than they should be.

So, it’s like, I’ll just read John Maynard Keynes, who said, “When the capital development of a country becomes a byproduct of the activities of a casino, the job is likely to be ill done.” And I think that’s what I kind of mean. So, when we’re just pouring a ton of money into whatever it is, subprime housing, when your capital markets kind of are deregulated and take over, and you effectively have legalized cheating and gambling, instead of actually trying to value financial assets, trying to be that middleman, that match between savings and investment, that’s when you have a problem. So, I’m not opposed to all speculation, but I am opposed, what I think the problem is now is, the greatest minds of our generation are focused on getting people to click on ads or getting people to gamble with massively overleveraged hedge funds. I mean, that’s not a good way to run a society.

Bethany: What do you mean by cheating? Do you mean cheating, per se, as most of us would think about as the definition, or do you mean cheating because what’s happening is somehow depriving the real economy of investment and talent?

Matt Stoller: I actually mean the first one. So, I don’t think that gambling and winning is cheating, but I actually do mean just straight up cheating. I think what people don’t like about the hedge funds or something like . . . I mean, Citadel is a great example, where they get a fraction of a penny off of every trade. I mean, that’s just cheating. That’s not, it may be legal, it may be not. Or there are hedge funds that will buy something or sell something, and then they’ll talk it up with research or they’ll post on the video message boards, CNBC, that’s kind of cheating. A lot of the rings and conspiracies, I think that are probably happening across the board. I know that I think there was somebody that was recently caught for price fixing on Fannie and Freddie bonds. I know there’s a bunch of dirty stuff with the Puerto Rican bonds. There’s just a lot of cheating that’s going on. No one would say, “Oh, that person just bet and made a lot of money because they were just smart.” It’s like, “No, they’re rigging the rules in their favor to profit.”

Luigi: His definition of cheating is a little bit too broad by my standards. If you call cheating, modifying the rules in your favor and taking advantage of that, probably 75 percent of the US economy is doing that. Large corporations are doing that from DuPont to General Electric. And including, I have to say, the universities themselves. So, let’s distinguish between what is distorting the rules, which is bad, but it’s different than violating the rules. And then there is another gray area where it’s not clear whether they are violating the rules, but they’re not doing something up and up. And, unfortunately, where there’s a lot of money at stake, you attract people who go very close to the rules—and often on the other side of the rules. And the history you are describing of all the financial frauds are an indication of that. The first goal is to avoid a major financial fraud. And, of course, you want to avoid also the minor ones, but the majors are the ones that cost disproportionately, the Madoff situations of this world.

Matt Stoller: Yeah. I mean, sometimes it’s hard to tell. You’ve got something like Citadel, which sits as a middleman. And, legally, I think they have a sleazy business, but I think it’s largely legal, of taking that fraction of a penny as a both market maker and a speculator. But, on the other hand, they’ve also been fined by the SEC for front-running their customers. And they’ve even been fined by FINRA for doing it. I mean, nobody gets fined by FINRA. It’s a self-regulatory agency. So, I agree with you. I think there’s a difference between just rigging the rules and then following the rules that you rigged and violating those rules.

But I think if you look from the financial crisis onward in the deep political nihilism that you see on Wall Street Bets, that sense that nothing matters, the rule of law doesn’t matter. I don’t think people parse the problems that . . . It’s just kind of like what I do in my society doesn’t . . . I don’t seem to have any control of my life and I don’t seem to have any control of my economic future unless I am kind of gambling in these weird ways. Our economic relationships are increasingly based on just raw power and not whether you’re making better goods and services. And that’s, I think, a scary thing to be involved in.

Bethany: I was struck by this, and I think per your point, I’ve always been pro-short sellers, obviously going back to the start of my career, as sort of the cops of Wall Street. The only people who are incentivized to find fraud and to find things that are wrong because they can make money by betting against it. What I was really struck by was the sheer amount of anger among people I know well, who are long-only investors, meaning they don’t short stocks. There was a ton of anger on the part of these people toward short sellers because it has become, I think, increasingly manipulative. And there are so many sleazy players out there now that are, it’s just a game. It’s devoid from the underlying fundamentals of the business. And I was struck among smart, sophisticated people who I would have thought would have been pro-short sellers, how many were very anti it because they’d seen too much manipulation going on in the past decade, and in an increasing amount in this era of free money. The game has just gotten uglier and uglier.

Luigi: I know you are “passionate” about Elon Musk, right? And I remember that we used to—

Bethany: Passion is the wrong word, Luigi.

Luigi: It was in quotes. The quotes don’t come through very well on the podcast. But, I think it was more than a year ago, we had on the podcast, a woman who was a very aggressive short seller. She was at the time shorting Elon Musk, or shorting Tesla. I think she must have lost her shirt in the meantime, because it went to the roof. And the fact that the leader of the people, the angry mob against the short sellers, was Elon Musk is indicative to me.

Bethany: I still get people coming after me for a negative Elon Musk story I did a year and a half ago. Every few weeks someone will resuscitate it and send it to me and say, “Don’t you owe the world an apology for questioning Elon Musk?” It’s fascinating.

Matt Stoller: I think what is happening is there’s a cult of people who have been in the stock market, and it’s just basically gone up since 2009. And you’ve got con artists like Tesla, or Elon Musk, and that guy Chamath. People are reacting to critiques of these people as con artists the way that Trump supporters respond to criticism of Trump, or Obama supporters took criticism of Obama. This is a religious thing now that’s pretty unhealthy. In terms of cheating, writ broadly, I think it’s beyond our financial markets. I know there was just another opioid settlement with McKinsey with no one going to jail. One of the things you said, Luigi, is you were like, “But if rigging the rules, then we’d have to talk about most big businesses and financiers and everyone and universities. I mean, that would be crazy.”

And it’s like, well, I mean, there’s a reason people voted for Trump. All that’s actually true and it’s a huge problem. So, we have a really serious problem now that the financial markets are just sort of . . . they reflect it and they amplify it. But the lack of faith in the rule of law itself, the collapse of faith in our ability to be a society, I think is reflecting itself in this kind of sense that maybe all we can do is gamble on GameStop.

Luigi: I have to say, that even I, when I saw the beginning of the unfolding of the case, I started to suspect that some of the, for example, regulatory intervention, when Robinhood decided to suspend the purchases of stock, I started to question whether this was a legitimate thing or not. And, I have to say, listening to the interview of the CEO of Robinhood did not help, because he was not particularly clear. And maybe he was not clear because he didn’t want to be clear, he didn’t want to say, we don’t have enough money to put as a deposit.

I think that the indication of how bad we are in terms of the economy is that not only the layman on the street, even the financial professor, I’m sorry to admit, started to doubt that the system is honest and that the rules are really enforced and working in the right way. And I think my understanding, I don’t know yours, Matt, but my understanding is in this case, there were the right rules, and they were enforced in a legitimate way.

Matt Stoller: Yeah. I mean, I think they suspended trading for legitimate reasons. I don’t think it was a conspiracy. Generally speaking, though, when I look at something like Robinhood and, of course, to be clear, what happens in the nonretail space is far worse, but I think Robinhood shouldn’t exist. I think it’s a sleazy business model. They automatically stick you into a margin account, which they shouldn’t. The big one is the selling order flow, which is just like . . . that’s just crazy corrupt. They entice you to gamble with user interface tricks. They throw confetti when you buy a stock, that kind of thing. And it’s a digital bucket shop. That’s what it is. That’s a bad thing to have in the hands of people, of anyone.

I’m not saying I’m immune to it. I don’t trade because I know that I would get really into it. I would probably lose a lot of money; it would be bad for me. And also, it wouldn’t be good for the economy writ large. There’s nothing virtuous about that. So, I think that these retail brokerages, they should have some sort of fiduciary duty beyond following the rules. They should not be allowed to draw you into extremely speculative endeavors that are sort of close to gambling. They should help you put money to work in the economy, and that’s it.

Luigi: I think that the model of Robinhood, and I will explain in a second what it is, the model of Robinhood reminds me very much the model of big tech, because it’s a model that offers customers a product at zero price. Google and Facebook offer you great products at zero price. And Robinhood offers you trades at zero price. And they get you in some other, not particularly transparent, way.

So, for those of you who are not familiar, how does Robinhood make money? Actually, first, it’s not clear they are making money yet, but how are they planning to make money? What are their revenues? And forget making money, any profits. How do they make revenues? And they make revenues by selling your order flow. That could be a legitimate way and an illegitimate way. Let’s start with the legitimate way, which is that there are a lot of small traders that ask for one share of Apple or three shares of Google. Those are fractional orders that tend to have very low liquidity. If you sell them to an aggregator that puts the oldest together, this aggregator can make a little bit of money in the process.

Now, a little bit of money multiplied by a large number, it can be a lot of money, but that’s the, at least, legitimate justification for selling the order flow. The problem with selling the order flow is that you’re not sure these people are getting the best price possible. It is like I get your order for a vacation to the Cayman Islands, and instead of giving you the cheapest vacation, I give you the one that pays me to give you a vacation. I think that that’s unfortunately common in other businesses as well, including in the old days, they don’t exist anymore, but travel agents. It is a problem, especially in the financial sector, where we’re not talking about small rebates, we’re talking about hundreds of millions of dollars of rebates. And those, of course, are very massive and potentially very corrosive, because the customers don’t see the cost of what they’re doing. It’s exactly like Facebook and Google. You pay for it, but you don’t see the bill.

Bethany: I actually like that analogy, Matt. And I’d love to hear your thoughts on it, because it reminds me of that old saying, “If you’re not sure what the product is, it’s you.” And then, when you think about your argument about the democratization of finance, and then the idea that Google and Facebook and social media were the democratization of media, it’s an easy slogan that sounds really good and really appealing and often serves as a cover for something much darker that’s taking place. And so, perhaps there’s an argument that Robinhood is the false savior, right? That it’s masquerading as this company that is bringing democracy and equality to smaller investors, but it has actually just found a way to capitalize on the anger rather than actually to offer a legitimate or value-creating outlet.

Matt Stoller: I love that. I love that analogy to big tech. I think that’s really right. And the other thing I think the analogy with big tech is that I think that Robinhood is trying to organize its user interface to be addictive. The other thing is Citadel gives Robinhood more kickbacks on options. So, it’s not just that the business model is based on kickbacks, it’s also that the more their clients speculate, like the riskier the trades, the better for Robinhood. So, they’re going to encourage people to do option trading,

Luigi: Yeah, but this, sorry. This is no different than any financial advisor getting more money to place some riskier funds with you. And since there is a kickback on the funds, the riskier the funds, the more money you get.

Matt Stoller: Fair point.

Luigi: I think that you are raising a very important point, which is this economic of kickbacks is pervasive and is destructive. And so, maybe the point is to address it at the root and say we should address it everywhere rather, than say, “You are responsible, you are responsible.”

Matt Stoller: Right. I mean, we have all sorts of laws in a bunch of different areas of the economy to address it. We have a law in the retail space called the Robinson-Patman Act, which says you’re not allowed to effectively engage in discriminatory pricing or advertising allowances and kickbacks. And we just don’t enforce it. Because one day the enforcers were like, “Eh, we’re not going to enforce this anymore. It’s not efficient.” But the law is there. And then you have a bunch of legal frameworks that exist throughout the economy to address this.

Bethany: Because, back to a previous thread in our conversation, we talked about how GameStop has captured the imagination of the public in a way few things do, because of that, we’re going to have congressional investigations. And right now, it looks like we’re going to have congressional investigations into Robinhood. In your view, is that the right thing to investigate? Or are we going to miss the point?

Matt Stoller: How you problematize is a political choice. So, you could look at, there’s a bunch of different ways that you could talk about this and frame it with your ideology. If you wanted to, if you were the democratizing-finance type, like Elon Musk, you could go and say, “How dare Robinhood not let people gamble the way that they wanted to?” And you could look into why Robinhood shut it down and look for collusion there. You could look more narrowly and say, “Let’s look at the role of Citadel. Let’s look at the role of, Robinhood is cheating customers.” And then, from some sort of the broadest standpoint, if you were a populist, you might step back and say, “Is this good for the real economy?” You bring in a GameStop employee, you could look and try to understand the relationship between GameStop and the real economy here. But I think the way you define the problem is the political choice.

Luigi: Yeah. I think that that would be an excellent idea to have hearings like that. My fear is that it becomes a fight between one side and the other over some details that are not particularly interesting. Let’s hope that with our podcasts, we try to elevate the conversation at a deeper point so that inspires Congress to go more deeply than just on the fight.

Matt Stoller: OK. So, guys, remember when Mark Zuckerberg testified to Congress the first time in 2018, and it was like a joke? And then you fast forward to 2020 when he’s testifying, and all the big tech CEOs are testifying in front of the Antitrust Subcommittee. It was putting them on the hot seat, really confronting them with really serious problems. The difference is preparation. The difference is there was a 16-month investigation where Congress had requested documents, done the work to actually understand these market structures, and then talked to, confronted the CEOs, with that knowledge and with the evidence. They said, “Here’s evidence. Respond to it.” The ideal way to do this, and I agree with you, Luigi, I think these hearings are going to be stupid and a mess. It’s going to be a bunch of people screaming that are kind of largely ignorant or incoherent. Because I don’t think they’ve defined the problem.

But the right way to do it, if they wanted to, is to use this as a kickoff. And to say, “We need to understand the markets and what’s happening and do a series and then start doing real investigations of the role of market makers, the financial plumbing, the relationship between the stock market and the real economy,” and do what the House Antitrust Subcommittee did, which is they did six hearings, and they did real doc review. And then, out of that, you get a legitimate, a very legitimized set of policy arguments that are grounded in evidence. So, that’s what I’d like to see.

Bethany: I think we can all agree that we’ll be pleasantly surprised if that’s what happens.

Matt Stoller: Yeah. I doubt it’ll happen, but we’ll see.

Luigi: But Cicilline, as you said, did do that in the last congressional hearings on big tech. The point that is often forgotten is that these hearings are good regardless, because even if they don’t lead to any particular action, they put some pressure and some transparency in corporations. Part of the power of large corporations is that people don’t understand what’s happening on the line. So, I think that very few people understand what happens with Robinhood. Even fewer people understand what happens with Google and Facebook. And I think exposing them is a role of a democratic system. I actually owe it to your book, Matt, understanding the power of congressional hearings if you have congressmen who know how to use it. Now, this is a lost tradition. Also, because most congressmen have to spend most of the time fundraising and they are preparing their career after Congress, which is being employed by the very firms they have to investigate. So, that tradition has gotten a bit lost, but I think there is a lot that can be done if it’s resurrected.

Matt Stoller: I totally agree. I mean, I was so excited when those Antitrust Subcommittee hearings, because that was like an investigation from the ’30s. Normally Congress just pretends they have the answers before they ask the questions. And I think that what was so exciting is that when they did the antitrust big tech subcommittee hearings, they asked a bunch of questions and they didn’t answer them until they had the evidence.

Luigi: And I think that this is what was missing in 2008, 2009, with the Obama administration. I think we missed some good Pecora hearings. I’m a big supporter of Pecora because he was an Italian-American. The irony is an Italian would pronounce the name Pecora, that means “sheep.” But it also means a liar, not a sheep. And that really defined the New Deal. I think that what created the space, the political space for the New Deal, in my view, was the Pecora hearings. And that’s what was missed during the Obama administration.

Matt Stoller: Well, you know my theory, I think the only economists should be Italian economists.

Bethany: I’m not even going to try to weigh in on this one.

Luigi: So, Bethany, Matt Stoller is one of the few people who make me feel like I’m a moderate, because he is so radical in every dimension. He throws around the word “cheating” a little bit too liberally by my standards, and my standards are pretty lax.

Bethany: So, I agree with you. I think it does depend on how you define cheating. Do you define cheating as that which is explicitly illegal, or do you define cheating as that which actually is legal, but is nonetheless taking an advantage of the rules and regulations and manipulation of the rules and the regulations to make money in ways that we all agree are abhorrent? I think if you define cheating under that somewhat more-lax definition, the problem with that is then we all may have our own ideas of what cheating is and what’s an abhorrent way of making money. And so, I think if you give Matt that, I understand why he’s using the word cheating.

Luigi: No, of course you can understand that. But I think there is a very important implicit risk in that, that if we are all cheaters, nobody’s a cheater and nobody gets punished. By being too liberal, I think you’re almost playing into the hands of people that say, “It’s too radical, nothing can be done, so let’s do nothing.” Unfortunately, that’s what we saw after the financial crisis. There was a side that wanted to put every banker in jail, and another side wanted to put none, and very few in the middle. Unfortunately, the side that said none won, and so no bankers went to jail. So, I think there is a risk implicit in that.

Bethany: I guess I agree with that, but I think the deeper issue is the cynicism that all of this has provoked in the populace at large, which I completely understand and sympathize with. Often what isn’t illegal is actually worse behavior than what is explicitly illegal. And a banker once described the financial crisis, since you invoked it, as the greatest heist in human history. And it was, in many ways, because so many people made a lot of money while a lot of Americans were left with mortgages they couldn’t pay. And so, that sort of system engenders a cynicism in the population. And especially when then there no means of punishing those people. I think the cynicism engendered by the inability to punish them is actually worse than the idea of shrugging your shoulders and saying, “Well, it’s all the same. We don’t know what to do.” So, I worry that some of where we are today is actually a direct flow-through from the cynicism created by the financial crisis.

Luigi: I agree, but I don’t mind the rage, I just want to channel the rage in the right direction. Because if you are thinking that this is cheating, then the solution is more-aggressive prosecutors. On the other hand, if you think that the laws are missing, then you need to politically push for better laws and better regulation. Trying to say that it is all cheating is too much for the prosecutors to take on.

Bethany: You’re Right, it does leave . . . saying it’s all cheating does leave you in a pretty hopeless situation. But I do think there is a deeper issue here that Matt gets out with the Cantillon Effect, which is this widespread sense that the system is rigged. And I think that super-low interest rates have rigged the system for the very reasons Matt articulates, which is that the money has flowed to people who are closer to the Federal Reserve. And I think even if people don’t understand the exact mechanism of that, watching the dramatic widening in wealth inequality since the financial crisis, and the sense that life has been very, very good and better for the very wealthy, but not good at all for those on the other end of the income spectrum, I think has been quite debilitating to the cohesion of American society.

Luigi: I agree with you on the fact that the economic policies we follow probably exacerbated income inequality, and that has created a lot of anger. However, the biggest cause might not be cheating. It might be the wrong model and the wrong perspective. Painting all of this as corruption might make it more difficult to see where the problem is and fix it.

Bethany: Yeah, but I do agree with Matt and with other people who have commented that GameStop really is a manifestation of a deeper sickness. I do worry, we closed our discussion with Matt talking about what Congress was likely to focus on, or what was likely to change in the wake of this. And I worry that there’s going to be a lot of attention directed at the specifics of Robinhood, of payment for order flow, of complex, somewhat technical things, and not a lot of attention paid to the real, underlying dynamics here.

Luigi: So, can we say that GameStop is like Trump, the manifestation of a deeper sickness in our society?

Bethany: Yeah. I think we can. I’m not sure how GameStop is going to feel about being compared to Trump, but then again, Trump’s game did get stopped. So maybe there’s something there.

Luigi: And again, going back to the theme that Matt Stoller is one of the few people who is more radical than I am. I have to admit that when I was a president of the American Finance Association, the only reward you have is that you can give a speech in front of all your colleagues and that speech gets published without much of a review in the Journal of Finance. That’s your one chance in your lifetime. And so, I decided to blow it by writing something that would not have been published otherwise, because what’s the point? And I actually asked the question that I know is very dear to Matt, too, which is, to what extent does finance benefit society?

And I arrived at the conclusion that, unfortunately, in a lot of cases, it doesn’t, but in some cases, it does and is important. I fear that Matt is painting everybody with the same brush. I don’t want to fall from one extreme to the other. We went from a world in which finance was a bad term to a world in which finance was the coolest thing on the face of the earth. And I think both extremes were wrong, and I understand the pendulum had to swing back. I fear it might swing back a bit too far.

Bethany: I’m more mixed on whether the pendulum can swing back too far. I think we’ve become an incredibly financialized society. Rana Foroohar, whom we both know, wrote a really great book about financialization. And I think it’s not been a good thing. And I think it’s had devastating consequences, both financially and societally. So, I don’t know where I feel the proper spot for the pendulum to land is, but I’m at least glad that it’s a discussion. And I don’t know if you remember this, but after you wrote that piece about finance being good for society, that’s actually how we met, because I called you after that.

Luigi: Yes.

Bethany: So, at least it accomplished that.

Luigi: That was a major accomplishment.