A Satire of Tulip Mania by Jan Brueghel the Younger, circa 1640. (Frans Hals Museum, Haarlem, Netherlands)
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This is the product of a bubble, the speculation on the rise of a stock price on the market, and one that probably won't last very long. What is new about the story are the speculators themselves: an Internet mob made an attack on the financial establishment, driving a stock price up against the wishes of hedge funds betting on the decline and eventual bankruptcy of a retail giant.
What exactly is happening with the GameStop share price? The history of financial bubbles tells us that calculation and rivalry are the key to explaining the rapid rise and fall of asset-prices. Speculation is a habit as old as finance itself, but the inexperienced investors seeking to undercut the hedge funds have a goal: they are also seeking to undermine an unfair financial system.
During the 1630s, the Dutch Republic, at its height as a maritime power, imported tulip bulbs from Central European regions. Increasing demand for bulbs, originally a luxury good reserved for the well-to-do, made them more and more appealing, creating a speculative frenzy. The mid-19th century psychologist and writer Charles Mackay noted that "the rage for possessing them soon caught the middle classes of society, and merchants and shopkeepers, even of moderate means, began to vie with each other in the rarity of these flowers and the preposterous prices they paid for them."
Nobody wanted to miss out on what appeared to be a chance at windfall profits. People wanted to outperform their neighbors and accumulate more money. This rivalry resulted in the disintegration of the market for tulip bulbs, the infamous Tulipmania of 1636, perhaps one of the first and most well-known bubbles. The market proved volatile due to the fall in the supply of bulbs as a result of the Thirty Years War. This made tulips all the scarcer and more desirable.
Merchants and brokers, instead of buying the bulbs themselves, bought "options contracts." These contracts, which promised a delivery of a batch of bulbs at a future point in time at a fixed price, drove up the price of tulips even further. Historian Earl Thompson argues that Dutch citizens began buying options contracts to speculate on the rising price of tulip bulbs in Amsterdam's markets, outcompeting the bulb sellers and each other. They hoped to buy the bulbs at these fixed prices, and then sell them for profits.
Unfortunately, the collapse of the market in February 1637 meant the prices actually dropped below the option contract levels and the Dutch Parliament was unable to enforce the contracts at the original fixed prices and compensate the bulb sellers, leading to a significant downturn in the Dutch economy. While people had made huge amounts of money trading bulbs earlier in the cycle, those left with unfulfilled options contracts after the price collapsed were out of luck.
What made the GameStop stock so accessible on Tuesday were options contracts similar to those used during Tulipmania. Non-commission trading platforms like Robinhood allowed inexperienced traders to pour their life savings into a singular bet on a bundle of stocks. But these investors weren't naive as some are portraying them. They simply expect someone will come after them who bears the brunt of the collapse.
In Britain during the 1840s, for example, crowds of inexperienced investors purchased shares from over 1,000 newly formed railway companies driving a bubble. But historians Gareth Campbell and John Oliver showed that while shares flooded the market and promises proved unrealistic, it is doubtful that the investors were unaware. Rather, rich investors expected high returns, while inexperienced traders expected lower returns correlated to what they could afford to invest.
None desired to be the loser or the last one to sell once the asset price bubble collapsed in what became known as the Panic of 1847. Investors knew the risk, but thought they could avoid it.
The panic bankrupted railway companies, threatening the banks that had financed them with collapse. The British Parliament, having learned from previous financial crises, responded to the bubble bursting by enforcing stricter regulation on the railway industry while bailing out the financial sector. The Bank of England dipped into its reserves and provided banks experiencing a run on their own branches with liquidity.
Like the Tulipmaniac or the 1840s railway speculators, the Redditor investors today used options contracts to get an edge over the next person in line.
What is unique is that the GameStop Rally was led by inexperienced traders doing battle against experienced investors, something we rarely, if ever, see out in the open. Hedge funds like Melvin Capital, which sought to profit from the demise of GameStop, are pillars of the financial establishment. The Redditor investors appeared motivated by a desire to expose insider greed while benefiting personally.
It is doubtful these traders are looking to save GameStop and turn the fortunes of the company around. Rather, they want to call the shots, to wrest the power of insider trading from financial elites and use it themselves. One Reddit user SuperSexyStocks, a former economics student, wrote on WallStreetBets, "when I saw the GME revolution I took what little college money I had and bought 100 shares of GME. This is our chance to stick it to those who never took us seriously. Either we forge economic history or lose it all, I'm willing to take this risk."
Countless memes sprung up in the spirit of jeer and mockery. The popular Instagram financial meme account Litquidity showed a meme with recording artist Drake, approving the "storming on capital" while disregarding the similarly named storming of the Capitol by Trump supporters on Jan. 6. Another account, beyond_woke_and_problematic, featured a picture of armed Capitol riot participants occupying the roof of a GameStop branch as Jordon Belfort, the stockbroker portrayed by Leonardo DiCaprio in the hit film "Wolf of Wall Street," is posed throwing money from the sky. Theirs is a financial insurrection which mocked - even as it sent stock prices skyrocketing.
Looking past the memes, it is important to remember the concept of moral hazard. We often hear concerns that financial elites are encouraged to make riskier investments due to the massive public and private debt used to sustain the financial sector. The U.S. Treasury and Federal Reserve bailouts of recent years prevented collapse but did not offer any meaningful structural change to how our banking or credit system works. We are seeing in the GameStop rally bad habits - not wealth - trickling down, as inexperienced traders desire to stick it to the insiders by mimicking their attempt to game the system.
This bubble may be unusual, but it, like other bubbles, reveals the need for structural change that can better channel investment and protect the economy. Lawmakers now seem serious about, for a start, regulating trading platforms. But the GameStop rally provides an opportunity for a more impactful regulation of the financial system. Often times, those at the top of the financial system can weather storms while ordinary people bear the cost of their risky behavior.
If history teaches us anything about bubbles, it is that markets are made - and destroyed - by human hands.
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