GameStop, Reddit, RobinHood, and Narrative Economics
Updated: 8 hours ago
EconBuff Podcast #23 with Ryan Mattson
Dr. Ryan Mattson talks with me about the GameStop short squeeze episode. Dr. Mattson walks us through the four potential narratives surrounding RobinHood's decision to shut down trading. We discuss the mechanical explanation, where RobinHood, is forced to stop trading for reasons related to clearinghouse and collateral constraints. We explore the trading curb narrative, and Dr. Mattson explains how the stock exchange often halts trading to stop severe drops. Dr. Mattson argues this is related to irrational exuberance idea and he shares how actions communicate information between actors and how this relates to stock prices. Next, Dr. Mattson elaborates on the regulatory threat narrative, where RobinHood must choose between stopping trade and bearing the short term costs of that, versus allowing the trading, and eventually facing regulation from Congress. The final narrative Dr. Mattson discusses is the nefarious version of the story where hedge fund managers pull back room deals to force RobinHood to stop trading. Finally, Dr. Mattson lays out the monetary explanation by dsciussing the interplay between money markets, capital markets, and speculative markets and how Federal Reserve policy has increased participation in speculation. To close out the episode we explore how Dr. Mattson views the regulation likely to come from this episode and whether this event strikes one for free markets.
Photo by Clay Banks on Unsplash
Transcript:
LEE STITZEL: Hello, and welcome to the EconBuff Podcast. I'm your host, Lee Stitzel. With me today is Dr. Ryan Mattson, professor of economics at West Texas A&M University. Ryan, welcome.
RYAN MATTSON: It's great to be back.
LEE STITZEL: So our topic today is the GameStop short squeeze, and specifically the narratives that surround what the Robinhood trading app did. Ryan, just start us with a quick, brief summary of everything that happened so that we can get into these narratives.
RYAN MATTSON: So the kind of story that's floating around at this point is that you had this GameStop brick-and-mortar video game retailer whose stock is expected to drop, so you have people doing short sales on this. And these internet investors from the popular social media forum Reddit, specifically WallStreetBets, decided that they were going to buy into this. This was identified by a user almost in the same way that, when Michael Lewis talked about The Big Short, Dr. Burry had identified a potential weakness in the mortgage-backed security markets. So they bought this up. It's driving the price. We see GameStop's price going up from $15 to $200 to $400, back down to $100. And there seems to be this kind of story going of, you know, you buy into this and you hold so that you can hurt some of the hedge funds that are trying to short this stock, that they're going after these people who are hurting brick-and-mortar retail businesses by this vulture-capitalism idea of profiting off of their demise.
LEE STITZEL: So before we get going, strike one for free markets, yes or no here?
RYAN MATTSON: I'd say no, but we'll see. We'll see how it turns out.
LEE STITZEL: We'll hold that. Well, yeah, that's an excellent point. We do want to remember we're in the middle of this, so there's a lot more coming down the pipeline, which is why I actually think it's an opportune time to talk about the narrative version of this. I think you and I are inspired by Robert Shiller's work. I'm going to leave some of that for later on in the podcast, but this idea that narratives matter, and I'll ask you about the details of that later.
But you've set us up nicely here, and now I want to propose to you, and have you explain to us, these four different narratives, these explanations of why Robinhood did what it did in terms of clamping down on the trading. So start us with just a little bit of detail there as to what the actual actions were that they did in terms of stopping the trading, and what are some of the features there?
RYAN MATTSON: So the facts of the case are, a lot of these retail investors, so if you think of an individual person buying an individual stock, the retail investors are using an app like Robinhood to make a lot of trades, or day trading, using their phone. And they then buy the stock through this. As the prices started climbing almost exponentially, and at the point where I believe GameStop reached about $300, $400 a stock, Robinhood stopped all trades on GME, GME being the symbol for GameStop, sorry. And then over the next few days began to lighten up, allow people to trade one share, two to a couple of shares, and now I think they're at 20 shares as we're recording this. Those are the facts at that point, that they did this.
Now, the question becomes, with a lot of the retail investors on Reddit who are looking at this and screaming bloody murder, because the timing looks really, really suspect. It's at this point where these hedge funds, these institutional investors who are spending a lot of money, or putting a lot of money into these shorts, are trying to extend those short positions so they don't lose on the difference in value from, you know, expecting a price to be at $15 to now paying it almost like $300, $400 for it. So the retail investors are seeing this as kind of a form of cheating. There's a couple narratives with it, so we want to kind of break down the different stories that are coming out. The first one I think that you wanted to get into is the mechanical.
LEE STITZEL: Yeah, so let me jump in there just a little bit, because you've set us up. That's like a perfect preview of what it is that we're going to do. And so I want to start with the most benign version, that there are mechanical reasons that these trades end up getting stopped and Robinhood takes on.
Before we go there, my understanding was they also just capped the purchases but allowed the sales of it, right?
RYAN MATTSON: Yes.
LEE STITZEL: So that's also a factor here, which I think is going to come in more importantly for one of our narratives that we're getting down the road, which you've already teased, which is there's a lot going on here. And that's why I want to give the listeners a framework for it. So it could be that this is completely mechanical. It's very benign. What's that version of the story as to why Robinhood did what they did?
RYAN MATTSON: So that version would be what Robinhood put up on their blog, and what's generally being put out on CNBC and other media sources. When a firm like Robinhood, for retail or institutional investing, needs to make these trades, they need to go to a clearinghouse. So what they do is they have to verify these sales and put up a certain amount of collateral at about nine, or sorry, 10:10 a.m. Eastern Time, something like that.
So Robinhood, in order to make a whole lot of these buys, I should say, these buys into GameStop, had to go to the NSCC clearinghouse, which is owned by the Depository Trust and, I can never remember acronyms, but the DTCC. They do a lot of stuff with overnight repurchase agreements and collateral. So they went to their clearinghouse and they said, "We have all these buys for GameStop," and the clearinghouse said, "Wonderful, fantastic, we'd love to do it. You need to put down $3 billion as collateral," to which Robinhood said, "What?" And $3 billion is kind of hard to come by.
So as this mechanical story goes, they don't have the collateral to put up for these trades, for these buys that their retail investors want to make. So they end up negotiating down to about $1.5 billion in collateral, and there's this kind of cooling-off period that goes with it, that they can't make these buys yet. And this is where your distinction of buy versus sell comes in, because for a buy they'll have to deposit; for a sell they'll have to withdraw. So the sell side should be fine, but it's this depositing of the $3 billion in collateral. There's nothing Robinhood can do about that, right? Because the clearinghouse is asking them for this collateral, and they just can't make those trades yet, so they'll have to wait.
LEE STITZEL: So there is a version of this story where it's just literally like a cash-flow issue for Robinhood: we just can't front these. So I think listeners are going to ask, wait a minute, this is happening online and this is all digital dollars. Why does this have to be a constraint? And I think that stems from maybe a misunderstanding of what's happening in these markets, that this is like all Monopoly money or something, and money that's digital isn't real, or something like that. So give us a brief comment on that before we turn to the next narrative.
RYAN MATTSON: So with this cash-flow example, you know, we kind of still have this almost 1970s, 1980s view of, if you think of a checking account, I write a check from my bank at Amarillo National Bank to your bank at Commerce Bank in Kansas City, and my check is then cleared by the Dallas Fed, which then clears it with the Kansas City Fed, and there's that kind of stretch of time. Oh, isn't it wonderful that we now have this digital program that can instantaneously do that with debit cards? We can do this with credit cards, so why not with stocks?
Well, there's a lot of this issue of regulation of what you need to put up as collateral, so that if something horrible happens, if 2007, 2008 happens again, then there's a certain amount of collateral to pay for that. So it may not be this kind of mechanistic issue, but there definitely is: you've got to go to the clearinghouse, you've got to put up your money, and then you can make the trade.
LEE STITZEL: Okay, so I'm going to turn to our next narrative, which is, is there a potential analogy? Anybody who's listening to this has heard the word volatility so many times that their eyes bleed now, but there is this idea in stock markets. So the New York Stock Exchange has these trading curbs, this circuit-breaker approach. Talk to us a little bit about how that might have played a role here, where Robinhood is just throwing the breaker to try to stop. Now, it's a little bit weird, so give us a sense, too, of why the stock market would do that and how that is both similar and dissimilar from what Robinhood did.
RYAN MATTSON: Well, so let's go back to 2010. We have a nearly trillion-dollar stock-market loss in the space of almost just a few minutes. It's called the Flash Crash, and this was blamed on algorithmic trading, on traders utilizing different programs that just went haywire. And so, like if your modem goes out, what do you do? You unplug it, plug it back in, and it comes back. So this is kind of the idea of the circuit breaker. If there's too much buying or too much selling and the animal spirits are getting too great, or the mathematical algorithms are not reading reality right, then we shut down the stock market, as we did in May of 2010.
So the second narrative then is from Robinhood's perspective, which they haven't, Robinhood themselves haven't put this up. They put up the mechanical, but this is another potential one, where they thought, okay, if we let these buys go through, we may be seen as responsible for the poor decisions of all of these individuals, and then we're going to end up getting, I'm sorry, I'm skipping ahead to regulation. Let me back up a second here.
LEE STITZEL: No, no, forget that. Those are related, and so I don't want you to sort of feel like you have to separate those things. I just wanted this sense of you...
RYAN MATTSON: Let me go back to the trades, then. So, you know, without the regulation, excuse me, all these trades are being made. It's a whole lot of volatility in the system, and maybe they can't handle it. Maybe their retail investors can't handle it, and things are just going too haywire. Everybody needs to calm down. Everyone needs to cool off and take a second, and let's all think like adults and stay off of internet forums and go back to fundamentals trading, right?
LEE STITZEL: So a cool-off period, right? Okay, so we take 24 to 48 hours for investors to cool down, and then they'll make better decisions. And I think that brings up a couple of interesting things that would be good to comment on.
One is, you're talking about the circuit-breaker effect and having to cool off, and that's literally a circuit breaker to try to disconnect the trader's mind from the activity that's happening in the market. And I think that gives rise to this idea, and I think our listeners would be right in questioning: how do we have this gigantic financial system? How do we have numbers being thrown around like $12 billion that are just hard to even fathom, and it can be subject to something like a flash crash? It can be subject to something like animal spirits, and we might need a trading curb, a circuit breaker, to shut these people off. Is that fundamentally human nature, that we get in this frenzy of trading and we get spooked by things? Or is it something fundamental to the financial system? Is it the interplay between those things? Talk to us about that just a little bit.RYAN MATTSON: I think it's just how we value these things, and I think Bob Shiller, in Irrational Exuberance, has a very good explanation for how bubbles can potentially form based on how people are perceiving prices. If you think that price is going to keep going up, you want to jump in while that price is going up, and you want to get out before it goes down. You can go the opposite way, too. If we're all expecting it to go down, then we all kind of want to get out, and this becomes a self-fulfilling prophecy.
We may lose touch with the price signal. If markets are efficient and competitive, then the price signal should be telling us everything we need to know about GameStop's value. GameStop is worth $16 per share, but then if you suddenly have 100,000 people saying, "No, no, no, we think it's worth $25 a share," then you're going to have 200,000 people noticing 100,000 people and saying, "Well, they're buying. That's going to go up." The price signal is sending, instead of a fundamental signal, a very exuberant signal. I was going to say a bubbly signal, but maybe not even a bubbly signal, just an exuberant signal that somehow maybe we were wrong with $16, maybe $25 is correct. And maybe investors see it going up to $100 and say, "Well, even if I bought it at $16 and it comes back down to $25, I'm still coming out ahead from $16." So we trust the price signal in a lot of markets to give us the information we need, and in this kind of exuberant situation the price signal is saying something different.
LEE STITZEL: There's a lot to me with that. There's a lot to be said here, and I think you could comment more in a moment on how financial markets and stock markets might work in this regard. But there's a famous story, I wish I could remember who it was that used this example first, but if you were on a road trip, you're driving down the highway, there's two diners right next to each other, and you pull up, you're hungry, it's dinner time, and all the cars are parked at one diner, A, and none of the cars are parked at diner B. Where are you going? Right? There's that information. There's this idea that other people have access to something that you don't know, and there's some wisdom in that.
It's also this idea that if you and I are farmers and our land is next to each other, and I see your crops are doing better than mine, it's because you know something that I don't know. Financial markets are sort of weirdly predicated on that type of thing. The price is going up because people are buying it. That means they must know something I don't know, right? I wasn't a part of WallStreetBets before this, so WallStreetBets must know something about GameStop that I don't know.
And yet it's sort of akin to that in a weird, I don't want to say perverse, way, but in a way that's harder to understand, because there's some truth to that at the diner. There's some truth to that if my neighbor's crops are growing better than mine, he figured something else out that I haven't figured out. But because of this animal-spirits idea, going back to the trading curb, that may not always be true in the market, and the self-fulfilling-prophecy thing becomes much stronger. Why is that?
RYAN MATTSON: Well, part of that is, I mean, the thing with animal spirits and the Keynesian argument is, as Keynes would say, the markets can stay irrational longer than you can stay solvent. At some point, the fundamentals of what these companies are worth and what these pieces of paper are worth are going to come down to some kind of fundamental price signal that is not at $120 or $90, but it's probably more likely at $12 or $13 or $14. And that's based on all of these trades back and forth of consumers and firms, or these financial agents who are demanding stock and supplying stock back and forth. And that goes back to kind of Smith's invisible hand.
There will be a pressure on GameStop to push back down, as I think we've seen today. I haven't checked right off the bat, but if I'm looking at this, we're at $106, which is a bounce up from, I think, this morning. But in terms of five days, on Tuesday it was $115. It was $232 on Monday. There is a pressure for this to go down, because people are going to want to sell off at some point. If you bought in as it was going up and maybe you didn't sell at $400, let's say you bought in at $50, okay, you missed your chance to sell at $400. There's going to be a lot of pressure to go ahead and sell at that $200, or that $100, or that $70, so that you don't lose out. Of course, there's the other possibility that you're holding on to it for completely different reasons, which I think we'll go into later.
LEE STITZEL: Right, yeah. So I think what's interesting about that is you've actually hit on, I somewhat tongue-in-cheek opened this talking about, okay, strike one for free markets, because I had sort of a longer-run thought here, which maybe I'll hold onto for a minute because I think we're going to get to that. Except it's interesting now that you brought that up because we understand GameStop stock just can't be $400. There are correct market pressures going the right direction, and this irrational exuberance, or just, we can talk about the motives for the people that did this kind of thing, that doesn't overpower the market, right?
RYAN MATTSON: I think there is kind of a false comparison where the market must always be perfectly right at all times, and this kind of episode lays the groundwork for saying the market doesn't work. But two weeks from now, we're going to look and GameStop stock is going to be exactly priced. And what's the market saying right now, with the price going up? It's a different price signal. We're not getting a price signal based on, say, the supply of the stock, or the fundamentals of it, or the return. We're getting it based off of demand, and you've got demand for whatever reason. You could have demand because you like a stock, you want to buy a stock, or you want to purchase a stock because you feel you're sticking it to the man somehow. All the price signal is giving us is demonstrating that when there's a demand increase, price goes up, which is Micro 101.
So I think that, you know, I talk a lot about efficient price signals and what the price is going to give us, and I think maybe I'm being too ambiguous with saying the price signal is, I might have said wrong before, inefficient. But really it isn't. It's the question of why are they buying it? What is demand doing to this price? Which is still well within competitive markets and free markets.
LEE STITZEL: So we've covered a benign explanation. It's mechanical, it has to do with clearinghouses, it has to do with collateral. We've covered sort of a related idea with trading curbs and circuit breakers, animal spirits, that kind of thing. Now let's get to that regulatory-threat idea, this idea that Robinhood is looking into the future, and they won't say this, but the executives are sitting around the table as this is happening in real time and going, okay, option A, let it play; option B, shut it down. Let's think about what the long-term consequences are. And we would be quick to observe some of that is going to have to do with the threat of what type of regulation is coming out of this. Lay that kind of thought process for the executives at Robinhood out.
RYAN MATTSON: So let's throw in the mechanism and the volatility. We see all that happening, and I'm at Robinhood and I'm saying to myself, oh my gosh, if this keeps going, I'm going to have everyone posting about how their brother-in-law lost thousands of dollars or their life savings and their kids are starving, and we're the ones that facilitated these bad investments by all of these people on Reddit, these retail investors on Reddit. And then you're going to have these firms, potentially these hedge funds, going out of business and then blaming it also on you because you facilitated the mob coming in. And you're going to get your rear end dragged in front of Congress and grilled by a bunch of congressmen who are not going to be very polite and are going to make tons of threats on certain regulations that are going to be placed on you and your business in the future.
So it may be within your interest to go ahead and say, "You know what? I'm going to take all the flak from the press and people online about, oh, they stopped trading at this particular time, because I may face a regulatory threat in the future that I don't know what Congress is going to do, I don't know what Janet Yellen or Jay Powell are going to do, and I may want to stop this crazy thing before it goes any further." So, take your lumps now kind of idea.LEE STITZEL: Yes. So you mentioned along the way this idea of people getting in and then just losing it all. And this goes back to the idea we were just talking about, where somebody bought at $200 thinking this was going up and now it's down to $100 and they're getting hurt, or they're buying something like a short and then really getting hurt because they don't understand what that is.
I think it's easy to sit back and armchair and point and say this stuff is irrational. There's probably some argument to be made there. I don't want to trivialize that kind of argument. But there's a lot of, and I think an increasing amount of, argument in economics related to this idea that people are willing to risk things that are in sort of a lottery scenario, right, where I'm willing to lose if the upside is winning super big, because there's this added benefit of playing the stock market.
Well, I tell my students this in class. If I'm an economist and I tell people that, they say, "Oh, okay, so what's the stock market going to do?" It's like, that's not what economics is. So my personal investing strategy, which you and I have talked about a couple times, I think, on here, is this very simple Warren Buffett-type idea. I put it in large-cap funds with low cost and let the economy do the work. I sort of figure if it's going to improve, then I'm going to win, and if it's not, we've got a different set of problems, right? So that's my reasoning here.
But a lot of people want that extra benefit of trading and playing in the stock market and winning because now I'm brilliant, right? This GameStop thing happened, and I saw it, and stocks started going up, and I went, "Oh, I got it." I bought, and then I made $100 off my $1,000 that I put in there. There's this extra benefit of gambling and winning, and I think maybe some people are okay with losing some money doing that. So I think we shouldn't be so quick to describe everything as irrational. I'm not saying that's what you were saying, but there is that narrative out there.
RYAN MATTSON: I mean, personally, when students ask me, "Do you invest in the stock market? Do you play the stock market?" my general favorite answer is, honestly, I prefer to go to Vegas, where I can maybe get a few free drinks out of it and see a show. Because I don't know what's going to happen in the stock market. I don't know what's going to happen at the blackjack table either. So at least I could have fun playing blackjack in Las Vegas. Or at least pre-COVID I could, as opposed to sitting on my computer and watching a number go up and down and thinking one's really going to skyrocket.
LEE STITZEL: Yeah, I'm saying there's extra benefit that people are getting from playing. They might actually prefer that. They might rather be trying to figure out where GameStop is going than trying to figure out what's going to happen in blackjack.
RYAN MATTSON: Now here's another kind of fun narrative on this. You've got a lot of people now staying home from COVID. How are you going to get your kicks? You're sitting on the computer. You're playing video games.
LEE STITZEL: Really good point.
RYAN MATTSON: You know what? Maybe day trade.
LEE STITZEL: That's a really good point. That's a really good point. Okay, so let's get to the moment everybody's been waiting for. We have a benign reason. We have the animal-spirits, trading-curbs, circuit-breaker reason. We have regulatory threat, which is what all the economists got excited about. And now everybody who messaged me and said, "You've got to do an episode about this," they want the nefarious story. They want the dark back room, smoke-filled, everybody's smoking their cigars and chuckling, their monocle in their eye. Give us the nefarious version of the story, and maybe assess it a little bit too.
RYAN MATTSON: So the nefarious version of this story is, we have the clearinghouse. The DTCC does a whole lot of business with these hedge funds and these larger firms, and maybe they get a call from these people who usually put down their collateral and make these trades and say, you know, "Isn't it great that we use you as a clearinghouse?" So then the hedge funds call in a favor to DTCC and tell them, "Well, look, the national clearinghouse that's supposed to be making these trades is apparently going to be making this huge trade with them. Can you stall it?"
And the point behind this stalling, in this conspiracy theory, is that you have hedge funds like Melvin Capital who have got this short position on GameStop, and if the price stays high, they lose a lot of money. And we're talking about going from $12 billion in assets to $8 billion in assets, so a $4 billion loss in their short positions on GameStop. So, of course, they have incentive to jump in on it and try and convince the clearinghouse to slow things down so that the institutional investors can get their money before the retail investors know what's going on.
And I'll add the other conspiracy theory on this, because some people aren't convinced that the retail investors are large enough to cause these market movements, that there are other hedge funds competing with Melvin Capital who want to get involved because they're seeing this point where they can possibly hurt Melvin Capital to their advantage. So then they're also getting involved with DTCC, saying, "Look, these retail investors, we can't let them come in and make things more volatile. We want to ride this all the way, so we want first dibs on those shares. Slow down your retail investors so that we can get to it first."
And that's the conspiracy theory here of the back room and the smoking cigars, both from, hey, Melvin Capital may want to slow things down, to Melvin Capital's competitors, who also could be price makers in this particular market, getting involved behind the scenes to take up market share. One of the big winners of the Great Recession was Goldman Sachs because they got rid of Bear Stearns and Lehman Brothers in a stroke, right? I mean, they were. So there's the conspiracy theory for you.
LEE STITZEL: So the reason that this appeals is because things like Robinhood stopping buying but not stopping selling, which is why I wanted to make that point clear early on, it really fits. I mean, that just has got to eat you up if you're involved in this thing. So you stopped the purchases so the price can't go up, but you allowed the selling, so you basically forced the price to go back down to bail out the short sellers.
RYAN MATTSON: Oh, that would be in the facts of the matter. I mean, what they did obviously and definitely led to price going down. There's no question.
LEE STITZEL: Yeah. So we live in a time, in a world, of conspiracy theory, and so academics like us always want to try to make sure that we're standing on that firm ground. And as a general point about conspiracy theories, often the intermediate parts of the conspiracy theory can look right and probabilistically be right, but the chain of things that have to be right, then multiply those probabilities together, and suddenly the conspiracy theory gets very unlikely. But there's only two links in this chain, seemingly.
RYAN MATTSON: Yeah.
LEE STITZEL: And so it seems like a likely story. I'm not trying to tie you down to a position, because we know we're only halfway through the story. A lot of things are going to come out in the next week or two weeks, and we want to make a podcast, we want to make sure Dr. Mattson looks good when this all shakes out. So I'm not trying to tie you down to a position that you'd make there.
RYAN MATTSON: Well, I think, and I'll be honest, I've got a lot of sympathy for the conspiracy theory because I personally would like to see a lot more retail investing. I would like to see people jump in because I feel that that's efficiency-improving. Yes, there are risks, but just like, so long as everyone understands when they're walking into a casino they can walk out with nothing, when you're walking into the stock market you can walk away with nothing. With money you can't bear to lose, right, don't do it. And don't short.
LEE STITZEL: Yeah. Don't gamble with your kids' college.
RYAN MATTSON: So I think, with the general narratives that we've put through, honestly, if I'm going to be an economist who cops out and does the whole "on one hand, this one," I'm going to go with all of the above at this point. I think there are two links in that chain, and I see a definite incentive for other hedge funds to get involved to the detriment of Melvin Capital. I see incentive for Melvin Capital to get involved to try and protect itself. I do see that Robinhood could come into problems with that collateralization.
So how much you think that mechanical story actually matters is one thing. It looks really bad that they allowed sales but not buys, especially right at that time, at that exact moment. Why not three days before that? Why not two days after that? So there's a lot going on, and I think the thing about conspiracy theories is they simplify.
LEE STITZEL: Yeah, it really does.
RYAN MATTSON: It really does make you, "Oh, you know, it's evil capitalists." This goes back to the explanations and narratives behind the Great Recession and the financial crisis of 2007. It was all greedy bankers, right? Except it wasn't. It was a lot of things coming to a head at that exact moment, and the story is much more complicated. But it really saves time to just talk about either a bunch of crazy Redditors, or a bunch of greedy hedge funds, or a bunch of regulatory agents trying to grab at power. And I think there's probably a combination of all of them, and maybe even none of them at the same time. It's a complex issue, and maybe things that we haven't even observed.
LEE STITZEL: But I think we have laid out a really nice framework for understanding the narrative. So what I want to do now is kind of take this to the macro world. Give me a broader understanding of the different kinds of markets involved, and what's the monetary approach here?
RYAN MATTSON: Sure. So this is the part of the podcast I think everyone enjoys, where I will once again blame everything on the Fed.
LEE STITZEL: This is our special section that happens only in the episodes that feature Dr. Mattson.
RYAN MATTSON: Right. So from a macroeconomic perspective, what we want to do is separate out what these stocks do for us, or what other things that are booming in price do for us, like cryptocurrency or equities. You can separate out these kinds of finance industries, for me in a macro term, into three specific markets.
A money market: we can think of cash, checking accounts, savings accounts, very, very safe, very liquid. You're not going to get rich off of them, but you're not going to lose to inflation, right? That's great. And then you have these capital markets. You think of bonds, and that's a lot less liquid, right? I mean, you can't really unload 10-year Treasury bonds very quickly, but you have these capital markets where you can kind of build up certain assets. You can maybe even throw property into this and look at mortgage-backed securities or things like that, these capital markets that we have that are nice.RYAN MATTSON: And then we have, you know, money and capital, and those two kind of feed on each other because you use the money to purchase the capital, and you can sell the capital in order to get the money. They have a medium-of-exchange service and a store-of-value service. So there's money, right? The three things of money: medium of exchange, store of value, unit of account. But then there's a fourth potential service of all money, and that's speculation.
So then we have a speculative market that's very liquid. You can sell equities, for example, very, very quickly if you need to. It's risky. Let's not kid ourselves. Equities are risky. Companies can go out of business and stocks can go to zero. If you're short, then you can go below zero, which is why we don't short.
So what does GameStop give us? Are we investing for the long run in GameStop because we really believe in the retail video market? No, not really. What we believe in is the speculation. That's the service that's providing. Now, how do I blame the Fed in this?
Well, the Fed will get into the money markets to stimulate the economy in times like a global pandemic, financial crisis, a recession. That's going to drop interest rates down, and that will bleed into capital markets. Bond returns will start to go down. But there are not just the store-of-value investors in bond markets. There are speculators. There are people running retirement accounts and pension funds that are trying to figure out how to get the best, I don't know, three- to four-percent return for their clients. And if the bond markets are giving you zero or one, where do you go?
So then you have, again, these very smart pension and retirement people who are then looking at the more speculative markets like equities and saying, well, the stock market keeps going up. 2020 was a bad year economically, but for the stock market 2020 was pretty good, actually. My retirement account did really well in 2020, and I'm fairly certain yours did too, especially if you were buying a broad set.
So we need this kind of speculative management going on to give us this return, especially if the Federal Reserve is driving interest rates below zero. So we've whetted the appetite for these investors who are responding to a price signal, and this is where I'll deviate from maybe Shiller's Irrational Exuberance and call it rational exuberance. We have investors...
LEE STITZEL: Let me pause you there just a little bit. So far, our listeners are going to go, "What's rational exuberance, and why is Dr. Mattson so keen on calling it rational exuberance?"
RYAN MATTSON: So irrational exuberance would refer to, with Dr. Shiller's work, Nobel Prize-winning work, by the way, bubbles and asset values being based on nothing but price forecasts or price estimates. So you see GameStop is going up, up, up. You don't know anything else about GameStop, but you know it's going up, so you think it's going to keep going up and you buy in. And that's irrational because you're not looking at the fundamentals of things. You're not making a full-information decision on the risks, and you're letting your animal spirits and your exuberance kind of take over.
This actually was based off of a phrase by Alan Greenspan, and that's where they got that, where Greenspan was talking about stocks in the mid- to late '90s, talking about irrational exuberance. Because, like most Federal Reserve chairmen, Greenspan didn't want to spook markets, so he gave a phrase that sounds really technical at first, and then when you deep-dive into it, irrational exuberance is just people going crazy. People are jumping in. They're afraid of missing out, so they're jumping on the bandwagon.
I'm going to argue that this is rational because I think they are responding to a price change, not just the nominal stock value they're seeing, but a price change in other markets, such as bonds or other returns, that they can't get a lot of return from.
LEE STITZEL: That's a brilliant point. So you're getting at this idea that we can't just evaluate what's happening in these speculative markets without also thinking about what the alternative options are. And I make this argument a lot in my graduate classes when we're talking about unconventional monetary policies. This has real consequences because it's taking away the normal options of investment that people would want to be in, and therefore it causes them to get into these other things, which has that kind of irrational- or rational-exuberance idea.
So what we're now seeing is people have this appetite for day trading when they wouldn't normally have had that, and not just the greedy institutional investors or the crazy, memified Redditor retail investors, but smart people looking at their portfolios in the future and thinking, well, the return on bonds is low. The return on cash and money is not all that different either. Where do I find this return? That's where equities provide that. And this is why you see the stock market going up and up and up in 2020. A lot of that has to do with this demand curve going out and out and more people wanting more and more stocks. If demand goes up, price is going to rise.
RYAN MATTSON: So the Fed is feeding this sentiment. Retail investors who are on Reddit, like, pardon my French, but here we go, you have Deep [expletive] Value, who last year, I guess, is the guy who found this. So what Deep [expletive] Value was able to identify, much like Burry in The Big Short, was that these stocks, and GME, he figured they weren't priced correctly. And he reported it and put it out there, and people were going back and forth saying, "No, this is wrong," or, "This is right."
He saw this. But would you, in another world where you have, I don't know, a four-percent return on a 10-year Treasury, would you have the Deep [expletive] Values of the world decide they're going to go in the bond market and then go back to work wherever they are and not pay attention, because they know the bond market is going to give them this nice, fairly regular return? Or even then you have, let's say Deep [expletive] Value is working at your typical hedge fund, he's making up a portfolio and he's thinking, "Ah, well, gee, this looks a little risky. I'm going to go to the alternative." Where else is he going to go?
We've created this environment since 2009 where we have a zero lower bound on interest rates for bonds, for cash. I was teaching my Money and Banking class the other day and showing them the real return on cash and the three-month Treasury bill. [Music] They're equivalent. You can either hold on to $500 in hundred-dollar bills, you can hold on to $500 in three-month Treasuries, and you'll get the same value from it.
So then you get that stimulus check from the government. You think to yourself, well, I don't know what to spend it on because I'm home all day, because we're all doing social distancing and being responsible as we should be, right? Okay, great. Don't go to the bar and drink it. Great, fantastic. So what do you do with it? Well, I guess I'll day trade.
The Federal Reserve, through what they've done with this kind of money-pump action that they've been doing and this debt monetization that they keep doing, is...
LEE STITZEL: Famous plug for a future episode right there.
RYAN MATTSON: Yeah, yeah. It's providing this kind of flat landscape for returns that is incentivizing people to look elsewhere. I mean, you can get returns from the art market. In the late '90s, you could get returns from comic books, right? People were betting on baseball cards, all of these things that weren't your traditional investments because the traditional investments just aren't giving the return.LEE STITZEL: So that brings up two really important things, and I'm going to take us back to that idea that I brought up at first, which is, you know, strike one for free markets. It doesn't seem like a free-market process, and you said, well, I don't think so. Let me make the case for that now.
So the hedge fund got their hand in the cookie jar, engaged in what seems to be, what's the word that people always like to use, the downside value of which is apparently a loss of $4 billion, right? And they got their hand in the cookie jar engaged in what seems, to me, I'm always thinking about diversification, what seems to be a bad strategy, or if it's not a bad strategy, at least an exploitable strategy. And Deep [expletive] Value comes along and says, actually, I can capitalize on this, I can punish this behavior, I can benefit from it. And I say, if that person, you had mentioned before we started recording, what kind of game turns $45,000 into $45 million, or whatever that number is? I say good for him. Strike one for the free market, because there's a behavior there that's exploitable.
And now I think if Melvin survives, at least other hedge funds that are going to survive, maybe they learn a lesson here, and maybe there's less of that type of behavior if it is exploitable, right? And I'm not really taking a position. You've said, hey, we shouldn't be engaged in shorts. I'm going to leave that for another comment.
RYAN MATTSON: I shouldn't be engaged in shorts.
LEE STITZEL: Yeah, that's an important clarification. Yeah, yeah. So where am I wrong? Where am I wrong? Strike one for free markets.
RYAN MATTSON: All right, all right. So here we go, and this will hearken back, I think, to your fantastic podcast with Dr. Bartel on monopolies. So in our money markets, we have a very clear monopolist on money supply, the Federal Reserve. They release the amount of money that the Treasury prints up, or they choose not to release that. They're the ones that do that. So that's not competitive. Monetary base, cash reserves, that's not competitive.
On the other hand, inside money, money that's generated within the banking system, is competitive, because Amarillo National Bank can create a certain amount of checking accounts and monetary service through that, and they compete with Bank of America for those depositors, who competes with Citibank, et cetera, et cetera. And we can make all kinds of arguments about whether or not bank concentration seems more monopolistic today than it did 20 years ago, but let's go ahead and say it's competitive.
So we have that inside-money money market that is now competitive. We can go to capital markets. We can start talking about mortgage securities and bonds, commercial paper. We can say that seems very competitive. We can go to equities then.
Now here's the question. This is, I think, where Melvin Capital was actually engaging in some very anti-free-market activity, because Melvin Capital probably figured that they could control this price. They figured that not only could they guess where it's going to be, but they could funnel it in a certain direction. And you can see interviews, I think Jim Cramer on CNBC has an interview where he talks about how, back when he was short selling, there were certain strategies that you engaged in with what you released to CNN or Fox News or CNBC, information on the stock price, which you can't quite do with Reddit because Reddit is now very much open. It could be someone telling the truth, it could be a bot, but there's this open information everywhere in Reddit, all these information signals that are now competing for your attention.
So what Deep [expletive] Value then does is post this information, and that can generate all of these little retail investors. I mean, this is like that death-by-a-thousand-cuts thing, or, you know, was it Gulliver's Travels where he's got the little, they're not brownies, but maybe, I think in the movie Willow or whatever. But okay, so when you've got a whole lot of little warriors attacking one giant, at some point, if you have enough of those little guys, the giant's going to fall, right?
So what Melvin Capital probably underestimated was the amount of investment that could come in from the retail investors, the amount of buying that could come from retail investors, probably also the buying from other hedge funds that want to get back at them as well. And they figured they were a price maker. And when you think you're a monopolist, you're going to behave as a price maker. I mean, in economics we have the perfectly competitive markets, price takers. I can't compete with my neighbor on price because he'll undercut me or I'll undercut him, and so we reach that equilibrium, you know, that magical X, right?
LEE STITZEL: Yep.
RYAN MATTSON: And we move towards that. There's pressure for them. Melvin probably thought that they didn't have that pressure. And when the cat's out of the bag and there's all this information about, oh, well, you know, it might be worth more, now we've got this rational exuberance going on and people are buying and holding. You had these massive amounts of posts on WallStreetBets, for example, talking about, okay, we're going to go back to Deep [expletive] Value's analysis, and everyone hold, buy and hold, buy and hold, buy and hold.
Melvin probably figured at some point they're going to break, and at some point they have, or they will, as, you know, it's just at some point it's going to come down, right? And people will sell. That's fine.
I think, in terms of free markets, I think the shorting positions were done very much with, not free market, but almost a price-making, anti-market strategy. And the market reaction of the retail investors is something that could potentially correct that monopolistic move by these hedge funds.
Now this is where the other conversation you and I have a lot about regulation comes in, because when the regulators come in, and I know Dr. Pjesky, you and I have talked about this before, I think with you guys saying if people are going to regulate this, or if Janet Yellen at Treasury or Jerome Powell at the Fed is going to come in and regulate, I'm saying when. I think it is a foregone conclusion that the Federal Reserve and the Treasury are going to step in and work on this. When they impose those regulations, is that going to create more market power or less market power for these hedge funds? And my bet is it's going to create more.
LEE STITZEL: Yes, which we can get into that, but that also depends on what the story is coming out of this. That depends on the narrative that we're going to tell about it.
So one of the things that we try to teach a lot in economics is competition disciplines a market. A market produces its own regulatory forces. Now, sometimes those fail, right? And that's where econ gets interesting a lot of times. But there's a reason that there's no need for us to regulate what kind of leather goes into our shoes, because market competition forces that kind of discipline onto the market.
And my point, strike one for the free markets, is this kind of argument that you made. Here's an anti-market behavior and here's a market reaction where they got caught trying to do something that maybe they shouldn't have. Not that I'm hailing WallStreetBets or Deep [expletive] Value as heroes or anything like that. I'm just saying, for every force that's trying to push one way, if you have forces that push the other way, that's the fundamental process of the market.
RYAN MATTSON: Here's that difference in narrative, because if I go on Reddit and I look at WallStreetBets, I see everyone saying, in terms of people looking at the markets, they're talking about free markets being Melvin Capital as a hedge fund, and then the Redditors and Deep [expletive] Value being the people who are going against this as populist or anti-capitalist. And I think you and I see that very differently.
LEE STITZEL: Yes.
RYAN MATTSON: And I will continue to argue very strongly that what Melvin Capital is doing is very much anti-market. They're behaving like a price maker. But I don't think that's the narrative that most people who are engaging online are telling about this.
LEE STITZEL: Well, I think there's two things there, right? I think there is this idea that some of this monopoly behavior, and anything business must be capitalist, or anything business must be free markets, and that's one thing you and I have to fight against a lot, which is, no, free markets is where we don't have the market power, we don't have the regulatory intervention, and people making their own choices and engaging in exchange leads to the kind of allocations that should be happening. And part of that is an absence of market-setting, price-setting power.
Which is to say, I think there's also another version of what you're saying. I think there is that version of WallStreetBets is against business, so therefore it's anti-capitalist or something like that, and I think that's pretty obviously wrong. But the other version of this story almost comes from the other side, is, well, they're engaged in market manipulation. But I don't see how WallStreetBets or Deep [expletive] Value, I don't see how those people did anything that could...
RYAN MATTSON: No. No manipulation. It didn't. I mean, if I go up and I post on some bulletin board down here at West Texas A&M that, I don't know, GE is overvalued, and I post it on the board, am I engaging in market manipulation? No. I'm putting out a price, or not a price, I'm putting out some kind of information signal that people can make what they want with it.RYAN MATTSON: When Deep [expletive] Value first posted, and you can find this post back, I want to say it was even back in 2020 when he started, you see a lot of people, you can set reminders in Reddit, right? There's one guy who said, "Set reminder for when this idiot loses all his money." And that reminder, I think, finally went off four days ago. So who's laughing now? The guy who put $56,000 into GME and got $48 million, or the idiot commenter who's like, "I'm going to laugh at him in a few months"?
LEE STITZEL: So I want to come around to another idea here really quickly. I had remembered back on Friday, this is changing so fast, so these kinds of things are difficult to keep track of, I had remembered somebody talking about him saying he was in for this and he was up to a million dollars and he hadn't gotten out. And so that's a sign that he really is fighting the man, sticking it to the capitalists, and whatnot. And so when you say he's turned it into $48 million, I'm always curious, and I don't think we can, we may or may not be able to know this, right? Has he actually gotten out and then turned that into some value that isn't held in GameStop stock?
RYAN MATTSON: Sure. I mean, that's a good question. I would have sold.
LEE STITZEL: I was going to say, you started with $45,000 and at close of business on Friday, or whatever you want, and that's armchair quarterbacking, right? I mean, this guy went in and did the homework and he can do whatever the heck he wants with it.
RYAN MATTSON: Yeah, for sure. And he chose to share that information.
LEE STITZEL: Yeah.
RYAN MATTSON: And that information, I mean, it's very, I'm sorry for lack of a better version, it's very democratic. I mean, it's very transparent. Everyone knows this. If this had been, you know, okay, Martha Stewart. Martha Stewart spent time in prison for insider trading. We can certainly do a podcast on that because I have strong feelings that, I mean, she should not have been in jail. I mean, come on, guys, really? Martha Stewart? But on the other hand, it gave us all those Martha Stewart-Snoop Dogg specials, which are fantastic.
LEE STITZEL: Right. So let me present, since we're on a topic of narratives, an alternative narrative there. There is this idea that people can sort of go about that self-reinforcing idea where I get some renown, I build up a newsletter, say, and I send it out and I say, "This price is going to go up," and I have a big enough readership that they buy, the price naturally goes up. But because I'm sort of the tip of the spear, I can get out first and win, and I've really just kind of suckered my own people.
And now it becomes self-reinforcing because then I can say, "Look, I told you GameStop was going up. I bought it. I made $48 million off of it, and you guys, you just didn't believe me. You got in too slow." But it's actually in part that I made money off of those people. So there's always that concern here. Comment on that as an alternative narrative to your democratic narrative.
RYAN MATTSON: So from that narrative, which I'm going to bet is going to be the narrative coming out of Treasury and, not FDIC, SEC and the Fed, that there's the potential for manipulating this stock, and that narrative then is going to lead to regulation where we need to protect the investor from himself because they're not smart enough to realize that Deep [expletive] Value may be manipulating the stock market at this point.
So really what we should have, and this is my concern, I guess, what we really should have is licenses for traders. Maybe we shouldn't have people day trading on their apps. Maybe they should all go to a licensed certified financial accountant or certified financial planner, pay the premium, and those are the guys who are going to make those sales because they're responsible. They don't get their information from Reddit. They get their information from their college degrees and these data sets and the firms that they work for.
And that, to me, is anti-market at that point, because what that is going to do is give even more power to these hedge funds, these financial firms, in setting that price, because these people giving this advice, we're going to go right back to that of, "Hey, we think GameStop is going to do this and that, and you should invest that way. And, oh, by the way, we work for Melvin Capital, who will, as another part of their corporation, start shorting."
Lehman Brothers did this. Lehman Brothers, when they had to be unwound, what a lot of the regulators who went in found was that Lehman Brothers had dozens of these different smaller corporations within the giant umbrella entity. And you'd have, I don't know, Mattson and Stitzel Really Safe Trades, and we'd be giving information to our clients and saying, "Yeah, you guys, to avoid these problems, this stock is going down or this stock is going up," and then they'd share information, or maybe just even be Stitzel and Mattson Really Risky Trades, and they'd start shorting on that information or betting on that information going in.
The thing that is so free-market and capitalist about Reddit is that the information is just out there. Now, granted, they could be bots, they could be fraudsters, or they could be just individual people sharing what information they have, and there's no charge for it. But I can definitely see where the regulators are going to want to come in and do something about this, and that's the narrative they're going to take, that Reddit can manipulate.LEE STITZEL: So let me jump in here because this is one of those ideas that I'm pretty fond of talking about, and I think it's never made it to the podcast before, so I'm glad you've kind of given me the opportunity here. This is what I call ghost stories. This is what I call ghost stories, right? Which is, nothing actually happened yet, maybe, and we say, well, here's this version of the story that can go all the way out, and Reddit is out there and there's a bot and he puts information out there, and then everybody buys in and we get this GameStop-bubble thing, and then it bursts and your brother-in-law loses his shirt, right? And so we need to step in and we need to create regulation that's going to certify.
And it's this pursuit of safety that has become just such an absolute cudgel in the hands of people that want to wield these ghost stories in favor of regulation, when you and I then would sit back and point out, right, and when this regulation happens, who benefits? Is it the retail investors? The answer must, by necessity, be no, because how does the regulation get formed? It gets formed in a system that promotes this centralization of things, and then the type of stories like you're telling about Lehman Brothers can happen.
So I would say it's absolutely imperative that we don't allow the ghost stories of your own agency to be used against you, right? I mean, your agency is in your own choice here being used against you. Your brother-in-law ends up losing his shirt, and I'm not trying to trivialize those types of things that seem likely to happen here in the next two weeks, and some of that where the guy that we're saying is leading this spear, does he turn out to be a good guy or a bad guy? Very difficult to tell, and that's why we wanted to make this narrative story.
But I would say one of the other narratives, one of the other common types of narratives, is what I'm going to call ghost stories. Here's this emergent behavior on WallStreetBets that then led to all these bad outcomes, and we need regulation, when you and I can just as easily say, right, and here's the ghost story in reverse that happens, and now we have Stitzel-Mattson Safe Bets that feeds information to Mattson-Stitzel Risky Bets, and you also lose. Wouldn't you rather lose making your own decisions? That's the importance of avoiding the ghost stories. Well, comment on that before I get us to one last topic.
RYAN MATTSON: Sure. Let's talk about some of the other, let me tell you another ghost story. So we talked about, I think we mentioned a bit about, the Flash Crash, right?
LEE STITZEL: Yeah.
RYAN MATTSON: With the Flash Crash in 2010, at the end of a five-year investigation the SEC makes one arrest. They arrest a London, described in the press as a point-and-click investor, living with his parents, a retail investor, as the guy who somehow started the snowball turning into an avalanche that became the Flash Crash, a trillion-dollar loss in May of 2010. And this guy gets arrested, and it was like, "Oh, you know, it's one of these retail-investor guys who's antisocial, or not charismatic, and he's making these algorithms and pointing and clicking." And so because of that we then have to regulate the algorithmic trading.
And they did impose regulations on this algorithmic trading, which may or may not have actually been a cause of this and may or may not have improved things or not. People complained about the New York Stock Exchange now having a bunch of computers instead of guys doing the whole buy-sell signal. Fine.
We can go to the ghost story of 2008. Société Générale lost billions of dollars in a day, and again one arrest made of this one guy, and somehow this one guy is one of the main contributors, not the bank itself, not the larger financial institutions, not the endemic uncertainty in 2008 financial markets just in general. No, no, we want these guys, and then we're going to put up a Volcker Rule about leverage. And I like Volcker Rules, but let me just go ahead and say that ghost story helps bring that about.
Or let's go to Long-Term Capital Management back in the late 1990s. These guys supposedly were these great investors, and they had to be bailed out. Long-Term Capital Management potentially, at least going to the story, led all this instability in the market. Probably it was more that instability in the market led to the demise of Long-Term Capital Management, but again, you can look that up and you can find a different story.
Or let's just go to 1929. All those greedy bankers and retail investors making all those irresponsible bets. And, you know, what's the story someone told of when the guy who's shining your shoes is talking about the stock market, that's when things are going to go wrong?
LEE STITZEL: Yeah. Well, that to me is, I mean, I can see the logic behind it and why you, well, yeah, okay, does he understand the risk involved? At the same time, that's a really arrogant statement.
RYAN MATTSON: Yes. And this guy being involved in it, does that say more about the risk inherent in the stock market, or more about the fact that he's just not getting anything from his bank and has to go somewhere else to find that return? If we're going to consistently push these people out of money markets and capital markets into speculative markets and assets, and drive up Bitcoin and GameStop and Dogecoin or whatever other things that we want to do, maybe we should look to what we're doing in bond markets and try and deal with that as well.
But I definitely see a point where the SEC and the Federal Reserve are going to want to put some kind of curb on retail investing because they're going to see that as a source of instability, and that's caused by this ghost story, or, sorry, maybe not caused by. They're going to use this ghost-story narrative to justify it before Congress, and Congress will make these new laws, which, hey, as a PhD in economics, that's probably good for me because then the Fed will need to hire more PhD economists, and that drives my wages up, right? So maybe I should be happy about all this.
LEE STITZEL: But I thought there shouldn't be.
RYAN MATTSON: Yeah, yeah.LEE STITZEL: Okay, so you've actually set us up perfectly to go into my next idea. So I want to wrap this whole thing together with this one idea. You've laid out the Fed is engaged in these behaviors, and it's squashing these normal forms of return that we would like to engage in our investing, right? That's that whole money-is-a-service idea, and we want to move consumption through time and space, right?
And so one of the concerns, I think, that stems from this is this idea that the way that we have financialized, and the way that we have made you search for yield in riskier and riskier and riskier places, has caused sort of an unnecessary entanglement between everyday business on Main Street and what's got to be happening on Wall Street. So close us out here with just a little bit of commentary on how the real economy, if you will, is being further sucked into this financial intermediation that's happening, and sort of the consequences of that.
RYAN MATTSON: Yeah. I mean, retirement funds is the first thing I can think of. You work and you put a certain amount of money into your 401(k), and on top of that firms can justify a little bit lower wages by offering you that wage match. If you put in, you know, $3,000, such-and-such amount, we'll put in, I don't know, $2,800, right? They'll match it. And that artificially depresses some of these wages. I mean, they're not really depressed, but you know what I mean, right? It's not that you're not getting the paycheck, but you are getting that benefit.
That can also lead to certain amounts of instability in whether or not people think they can retire. I look at these markets and I'm like, oh, well, you know, I'm going to retire when Social Security kicks in at 65, right? So, yeah. But then again, I'm a professor. I can do this until I'm 80 if I want. And I look at the stock market and think, hey, the stock market's doing well, but there's a whole lot of exuberance, so I'm concerned what's going to happen. I may just keep working until I'm 70 or 75. And then that creates this issue with labor markets of, you know, I'm not making way for another younger professor to come in and step up. I'm taking this job. But then we can also argue that maybe I'm looking too much from a zero-sum-game point of view on that.
We've tied up retirement accounts, certain amounts of wages. We can do stock options with wages as well, right? That deals with whether or not people are making a certain amount of wages. We can tie in where these firms are getting money to expand. They've got to go to a bank and they're facing a certain amount of interest, and the bank may not be able to offer, or no, sorry, they may not be able to charge all that much in interest, which is good for the firm but not so good for the bank. Maybe it wants to get that return. So where does the bank go for its return? It goes into the equities markets.
In 2008, we had all this problem of certain banks getting into investments they probably shouldn't, which were not insured by the FDIC, and making these banks more unstable than they actually looked on paper. Again, where else are they going to go if interest rates are this low? Yes, it's good that firms can expand, but then the bank that's offering that interest rate may not, you know, then they look for other things, fees. Maybe they'll decide, you know, we just won't loan based on certain characteristics to make up for the fact that we're not making as much in interest-rate prices.
We are very much tied to what's going on in finance because finance is kind of the plumbing of the economy. It allows for firms to expand by generating these loans. It allows for brick-and-mortar to be built. But if the plumbing doesn't work, if you don't get water to the proper places where you need water, then it's just not going to grow as well.
Right now you can go out and find funding. You can get it even during the global pandemic. In 2007, 2008, with the liquidity freeze, you couldn't find funding for anything. So if we have this increasing instability in the financial market, increasing instability of banks, and banks closing down because of making investments they quote-unquote shouldn't, that can lead to real effects. That can lead to real increases in unemployment based on financial crisis, which is what we saw in the Great Recession. It could lead to people not being able to afford housing. Because mortgage interest right now is very, very low, which is good, but then housing prices are now very high, which is the trade-off there.
LEE STITZEL: Yeah.
RYAN MATTSON: But, yeah, it's part of our economy that we do need to pay a lot of attention to, even things like this. I wouldn't worry about things like GameStop crashing the economy. That's never going to happen. GameStop can't even crash the stock market. You look at the overall trends in the stock market and GameStop is down, the S&P is up. GameStop is up, the S&P... There's no endemic problem with GameStop in particular. But the problem could come in with the instability.
And then also you can get irrational exuberance downward. You can get people getting really afraid of the stock market and pulling out, and that demand contraction is going to lead to prices going down in the stock market, much less return, and those pension funds and those 401(k)s losing value.
LEE STITZEL: My guest today has been Dr. Ryan Mattson. Ryan, thanks for joining us on the EconBuff.
RYAN MATTSON: Thanks very much.
LEE STITZEL: Thank you for listening to this episode of the EconBuff. You can find all previous episodes on YouTube at EconBuff Podcast. You can check out our website at econbuffpodcast.wixsite.com/mysite. You can contact us at econbuffpodcast@yahoo.com.
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