Basically the short sellers have negative brand value and the stock market has worked out a way to charge them for this debt.
Markets are efficient as long as nobody legitimizes coercion. If nobody can force you to break your contracts, or force your counterparties to allow you to renege, then the market can properly aggregate demand.
Yes, if you try to price GameStop stock based on 'fundamentals' (which mean nothing without hardliner dividends) then you will get the wrong answer, because you have forgotten that money isn't worth anything.
Money is valuable because it can be used to buy things. The things are valuable. Money is merely a means. One of the valuable things money can buy is the ability to express hatred. If money's only value was to get more money - the mindset which says GameStop's stock price is 'inefficient' - then it would be a self-licking ice cream cone. Nobody makes self-licking ice cream cones. Someone does mint money, and therefore it must not be self-licking. Price hatred into GameStop's valuation and it makes perfect sense. Finish accounting for all the things it can buy. Don't stop in the middle to fraudulently 'prove' a market is inefficient or a human is irrational.
By contrast, if a market allows coercion then the coercive agent can simply force all other players to pay whatever they want. If the coercive agent doesn't immediately tax/rent all other players down to the poverty line, it's because there's some fig leaves still around. (Likewise the Laffer curve has to be adjusted for the value of lording it over a bunch of filthy peasants who were too weak to resist your traitorous parasitism.)
https://twitter.com/elonmusk/status/1354890601649610753 Musk obvs real mad that $TSLA keeps getting shorted.
Taking a company public is a breach of honour and responsibility, moron. You asked for it.
I think Musk is a low-level lord, like a baronet or something. Overqualified compared to all this competitors, very underqualified compared to the intrinsic demands of his position. Winner of height contest for midgets. Though his companies probably have a high lord concentration, allowing them to suck less than would normally be expected.
You don't sell stock you don't own. That would be great. I'd love to sell all of /r/WSB's GameStop stock and pocket the proceeds. Woo! It's not mine, but who cares?
Rather, you get stock lent to you, and sell that. The buyers of this loaned stock can then re-gift it and have it sold again, which is what leads to the interesting accounting quantities.
Loans are loans. When you have loans without collateral, things can get hairy. This is not exactly rocket science. This is (ref: all of history) not a reason to ban loans, this is a reason to understand risk, and not to underwrite risks you can't afford. Someone underwrote Melvin Capital, and if they didn't want to get short squeezed then they shouldn't have done that. Personnel is policy, and Melvin is a getting-short-squeezed kind of person. It pays to know these things.
Short squeezes are still zero sum because Melvin Capital does not have infinite money. You cannot extract more money from a short squeeze than the underwriters possess. ("But money printer" no, that merely steals the money from long cash. Theft is coercion. It forces everyone who holds dollars to in part underwrite Melvin Capital.) It may seem there's some finagling when someone who loaned stock finds the debtor cannot repay the stock, but that's the risk you take when you underwrite a loan. If they didn't know they were underwriting a short position, they should have asked.
Those long GameStop also take on risk. If everyone is playing aboveboard Melvin will have the cash or other assets they gained by selling the short stock, and GameStop investors will be able to extract it. Sum = zero. However, Melvin could have easily bought something illiquid, in which case those long GameStop will have a difficulty known as burying the corpse.
E.g. one of the illiquid assets Melvin Capital could have bought is Melvin's time and labour. He gets to keep that salary no matter how bankrupt Melvin Capital becomes. This is the risk those who wish to be long GameStop need to be aware of. Else, a fool and his money are soon to part.
Melvin Capital is of course perfectly safe. The locus of legitimized defection or whitewashed deviance known as USG has repeatedly demonstrated capacity and willingness to bail them out if e.g. a short squeeze happens. MC employs an army of 'risk analysis' mainly to disguise their mafia membership, and slightly as sinecures for lower-ranked mafia members. Further, Melvin plays much safer when it's his own money. His professional position is extremely risky and his personal position can be safely described as aggressively boring. (Just in case USG goes Lehman on Melvin Capital.)
None of this would be a problem for anyone but WSB & Melvin et al, except 401(k).
It should be fine for stock players to extract arbitrary amounts of money from the stock market and cause arbitrary crashes, because this would only affect other stock players, who either accepted the risk or are fools with money. The worse the turbulence the more disciplined the players will end up. Except, pension plans. The stock market is vastly inflated by all the fake 401(k) demand, which means there's always lots of money to extract, which means effectively stealing from Grandma, who cannot possibly understand or even be aware of the debt she's forced to underwrite, and is fraudulently assured she is taking on minimal risk.
When Grandma gets stolen from, she flinches. Weird. What a wuss. When Grandma flinches, every Grandma-class investor flinches, America as a whole flinches, and you get what's known as a recession, to which America is particularly prone due to artificial, price-controlled low interest rates causing malinvestment. America's businesses are largely fake and thus delicate in the face of shocks. (Then you realize China's economy is even worse. Hoo!) Though the GameStop thing isn't particularly dangerous due to ncov having already shocked the hell out of the place recently, and thus only robust businesses are still around (e.g. real-prices profitable).
Naturally when the recession is over, someone re-inflates the stock market and makes it a nice plump and juicy target again.
The idea is that the mafia is allowed to slowly extract value from pension plans, thus stealing sustainably. Tax rates can never be too high, after all. Since everyone's returns are getting jacked, there's no background to see the con against. You have to, like, actually know things, and Grandma is aggressively ignorant. Her position is super long delusion. Unfortunately the dons can never quite prevent the mafia from wanting to go all [roaming bandit], and anyway the market is never as well-insulated against nonlocal roving bandits as they would like. Bend over, Grandma.
America cannot unbugger its stock market because the buggery is how the supporter-parasites leeching it are being paid off. If the relevant Czars could afford to cut off these supporters, they would have already done so. However, should a country have an unbuggered stock market, there shouldn't be any reason to ban bad debtors from taking on debt. The problem of usury is the victims, not the perpetrators. Personnel is policy. Ban the victims. But...Gnon does that without prompting. The natural consequences ought to be terrifying enough. However, I could be wrong. Maybe someone will try it eventually.
I also know of coercive feedbacks between stock prices and CEOs. Stock prices should be able to fluctuate arbitrarily without forcing the CEO to make stupid decisions and affect day to day operations. Stock is by definition not owned by the company and votes aside should affect a company no more than your decision to walk your dog does. However, this is not the case. I don't know how a general stock crash forces companies to be stupid, but there probably is such a force. If you've done your set 2s, you can feel a fat band of pressure in just the right place. Maybe it's options as remuneration?
By the way, if you want to stop a Bank of England going all BoE, all you have to do is not stand in the way of the Bank Next Door To The Bank of England. The problem isn't weird derivatives, the problem is guns, especially guns that have to hide where they're pointing to avoid spooking Grandma. Stop digging: no hole appears. Lies are bad, mmmkay. Same way Melvin's professional and private investments are so very different; all you have to do is stop propping up his professional insanity and nobody acts crazy. Or more precisely, the crazy promptly go bankrupt and render themselves irrelevant.
Anyway if WSB gets what it wants, it will piss off the mafia and embarrass the don in front of Grandma. (Again.) The don has to keep Grandma pacified so he can keep paying off his consigliones with the change from her couch.* I wouldn't bet on the don letting you spook Grandma if I were you. It's a sinking ship, and the game is to gather as much 'salvage' as you can yet leaping off before it actually goes under. Good luck.
*(God that's lame. I didn't realize how pathetic that was until I put it into words.)