While the GameStop saga continues to unfold, the call for government intervention has only gotten louder as a group of mostly amateur investors — connected through social media and trading apps — has made several well-known Wall Street firms with large short positions in GameStop stocks bleed billions of dollars.

White House Press Secretary Jen Psaki announced that President Biden’s economic team and Treasury Secretary Janet Yellen are closely “monitoring” the situation. Sen. Elizabeth Warren is pressuring the Security and Exchange Commission for new regulations. House Speaker Nancy Pelosi, D-Calif., said Congress would be part of the GameStop scrutiny.

One major question remains, however: Can government fix a problem it helped create?

The GameStop trading tale began when several well-known Wall Street firms, including Melvin Capital and Point72 Asset Management, believed that brick and mortar businesses like GameStop were dying, so they bet that the stock price of Gamestop would go down significantly. They were so confident in their assessment that they sold an apparent 140 percent of Gamestop shares available to purchase.

In any normal time, they probably would be raking in billions by now. After all, they are the professionals — the experts who knew the level of risks they were taking and have successfully pulled off such moves many times before.

We do not, however, live in normal times. The pandemic and our government’s responses have changed everything.

First, the lockdowns led to many first-time investors. Our government responded to the COVID-19 pandemic by shutting down the majority of our economy and forcing many Americans to stay at home for most of 2020, while giving many still-employed people extra cash.

The prolonged lockdowns, isolation, and unemployment for many have left people feeling bored and restless. People are hungry for social interaction, yearning for the sense of belonging that comes with an authentic community, and desperately seeking things to do that would both kill the extra time and bring some excitement into life.

Some people who never traded stocks before the lockdowns found their way to stock investing for the first time because trading stock was something new, stimulating, engrossing, and even addicting. Through discussion boards such as r/WallStreetBets — a discussion group on Reddit.com — and other social media platforms they found other like-minded people, a sense of community belonging, and the excitement that had been denied for months due to government lockdowns.

Robinhood, a trading app, has seen its user base grow more than 30 percent and trading volumes grow more than 130 percent between the first and second quarter of 2020, indicating that government lockdowns created a new generation of retail investors.

Second, the Federal Reserve created a stock market bubble. To minimize the economic damages caused by government lockdowns, the Federal Reserve pumped an additional $3 trillion into the U.S. financial system. This excessive money printing, along with the Fed’s decision to keep the key interest rate near zero, created little incentive for savings, pushing more yield-seeking investors into the stock market, and producing a stock market bubble that is often disconnected from the struggling economy.

The higher the stock market euphoria went, the more it became attractive to Americans from all walks of life, including many who never invested before. The low borrowing cost and widely available liquidity also encouraged risky behaviors such as using options to make outsized bets to seek higher returns. But the size of loss might be doubled or tripled if the bets were wrong.

Third, for some, stimulus checks became capital for stock trading. The U.S. government rushed out a $2 trillion stimulus package at the end of last March, hoping to “save” the economy from the downturn caused by lockdown policies. As part of this package, every American who was 18 or older, regardless of their financial needs, received a $1,200 stimulus check.

Government planners had hoped that Americans would spend their stimulus money to stimulate the economy. To the surprise and dismay of the bureaucrats, however, more than two-thirds of Americans chose to either save their stimulus money or use it to pay down debt instead of spending it.

Some used the government check as initial capital to invest in the stock market for the first time. The way they saw it: since the stimulus check was “free money” they didn’t expect anyway, if they lost it in the stock market, it wouldn’t hurt. Because of limited capital, first-time investors tend to invest in beaten-down stocks of companies they are familiar with, such as AMC Entertainment Holdings and GameStop (of course, AMC was itself a victim of government lockdowns).

In summary, this was a response to government-imposed lockdowns that crashed our economy, cost millions of jobs, sent good companies to the brink of bankruptcy, and drove down their stock prices. Then the government came to the “rescue” with money-printing, creating a stock market bubble and providing seed capital for investing. Stay-at-home orders and unemployment gave birth to a new generation of retail investors. Now, investors more apt to wear pajama pants all day while trading from their smartphones have taken down suit-wearing, jet-trotting Wall Street professionals.

Yes, government policies helped create today’s GameStop mania. Now, in typical government tone-deaf fashion, it will try to “fix” it. Yet history has shown us over and over again that government “fixes” usually make the problems they created much worse. As President Reagan famously said: “Government is not a solution to our problem, government is the problem.”

This time is no exception. Any new rules and regulations that will either restrict short-selling or the ability of retail investors to trade securities will further distort the stock market and only hamper confidence in our financial market.

The reason we have the world’s most successful financial market is that participants believe our financial market is more efficient, transparent, and fairer than any other financial markets in the world.

If our government imposes any new rules that give an impression that it favors one group of investors over the others, many more investors will regard our financial market as a rigged system and lose faith in it. This will be detrimental not only to our financial market but also to the foundation of our entire economic system. Congress and the Biden administration need to keep that in mind before they rush out any “fixes.”

This effort is long overdue. Chinese companies have enjoyed open access to U.S. capital markets for years and collectively raised billions of dollars from international and American investors. Capital from global investors helped fuel product innovations, and market share expansions for these companies helped to mint many Chinese millionaires and billionaires. There are currently more than 250 U.S.-listed Chinese companies with a combined market capitalization of more than $2 trillion.

According to U.S. securities laws, work done by auditors of all publicly traded companies in the United States must be subject to supervision and routine examination of U.S. regulators such as the Security and Exchange Commission and the Public Company Accounting Oversight Board. Yet by invoking national security concerns Beijing has prevented U.S. regulators from inspecting the financial records as well as auditors’ reports of Chinese companies. This is a gross violation of investor protection.

Turning a Blind Eye

It is widely known that the financial statements of Chinese companies are not always reliable. The Wall Street Journal reported that in 2018 alone, auditors declined to endorse 219 annual reports prepared by Chinese companies, meaning these auditors either found serious issues with those reports or had expressed concern about the likelihood of survival for these companies.

Some of China’s home-grown accounting firms are just as unreliable as their corporate clients. Rather than acting as gatekeepers, these firms have turned a blind eye to their clients’ fabricated financial statements. For example, in 2019, a Chinese regulator found that GP, a Chinese accounting firm, failed to disclose in its audit report that one of its corporate clients inflated its cash holdings by $4 billion.

Unfortunately, when a bad thing happens in China, it rarely stays in China. With the assistance of Wall Street, some of these Chinese firms with questionable, or even fraudulent, accounting practices have made it into the U.S. stock markets. Based largely on Wall Street’s rosy forecasts that these companies are the next best things, international investors bought shares.

Exposing China’s Billion-Dollar Lies

Ironically, it took a pandemic originating in China to expose the billion-dollar lies sold to international investors. April saw two big accounting scandals from two U.S.-listed Chinese companies. One was Luckin Coffee, a startup chain in China.

Three Wall Street firms — Credit Suisse, Goldman Sachs, and Morgan Stanley — made millions by underwriting Luckin’s 2019 initial public offering. Luckin’s IPO on the NASDAQ stock exchange granted enormous credibility to what was then a one-year-old company and enabled it to raise $645 million from investors based on a promise that Luckin would soon overtake Starbucks to become the largest coffee chain in the world. At the beginning of 2020, Luckin was worth $5 billion with a share price of $51.

Luckin’s luck ran out, however, under the weight of a two-month coronavirus lockdown in China. On April 2, after denying accusations of accounting fraud by U.S. short-sellers, the company finally admitted that its chief operating officer and several close employees fabricated 2019 sales by about 2.2 billion yuan ($310 million), meaning 75 percent of Luckin’s reported 2019 sales were fake.

Luckin’s stock price plummeted more than 80 percent that day, wiping out more than $2 billion of its market value. Four days later, Goldman Sachs disclosed that Luckin’s Chairman Charles Zhengyao Lu defaulted on a $518 million loan. While NASDAQ ultimately delisted Luckin stock, hundreds and thousands of investors, including many Americans, had already suffered significant losses.

In the same month, TAL Education Group, another U.S.-listed Chinese company and one of the largest education providers in China, revealed one of its employees had inflated the company’s sales by “forging contracts and other documentation.” The share price of TAL dropped 23 percent in one day and reduced the company’s valuation by $1.8 billion.

Had Wall Street firms done due diligence before underwriting the public offerings of these companies, and had the Chinese government allowed U.S. regulators to examine their books from the beginning, these two companies might never have been able to list on any U.S. exchange and international investors would have been protected.

An End to the Stonewalling

The legislation President Trump is expected to sign into law serves an ultimatum to the Chinese government: either allow U.S. regulators to inspect the relevant financial books of Chinese companies and audit reports, or delist these companies and lose access to the most important capital market in the world. Rep. Brad Sherman, D-Calif., told The Wall Street Journal, “Without this bill, the Chinese have been just stonewalling us, and we certainly shouldn’t make it easier for a Chinese company to get American capital than an American company.”

Wall Street is not happy with the bill. They are concerned that rather than complying with U.S. requirements, the Chinese government will persuade Chinese firms to take their listings to Hong Kong or Shanghai stock exchanges. This may mean Wall Street gets fewer lucrative underwriting deals for Chinese companies in the future.

More importantly, Beijing may retaliate by shutting Wall Street out of the biggest prize they have been seeking for years: access to the financial market in China. Yet Beijing has promised to open up China’s financial sector to foreign financial firms since the 1990s, and has never done so.

Instead, the Journal reports the Chinese Communist Party makes sure that Chinese financial institutions it controls “thoroughly dominate every sector in finance, from commercial and investment banking to private equity and asset management.” Consequently, Wall Street firms have a very limited presence in China and little name recognition among average Chinese consumers even to this day.

Still, driven by the hope to eventually gain a significant share of the China market, Wall Street remains the loudest cheerleader of China in the United States. Indeed, during U.S.-China trade negotiations, Beijing has often relied on leaders of Wall Street — such as Stephen Schwarzman of Blackstone Group and Hank Paulson of Goldman Sachs — as “go-betweens” with the Trump administration.

Wall Street Regret May Come Too Late

Wall Street firms not only often lobby the U.S. government on behalf of the Chinese government but also eagerly endorse the Chinese government’s controversial policies to please Beijing. For example, between 2016 and 2017, more than 30 Hong Kong-traded Chinese companies required their boards to seek advice on major decisions from Communist Party committees.

Even though this would enhance the CCP’s control of these corporations at the expense of reducing shareholder influence, U.S.-based BlackRock funds — the largest asset manager in the world and the self-appointed champion of corporate governance — voted in favor of the change, as did many other Wall Street firms. For Wall Street, it appears that as long as they get to make money, it doesn’t matter too deeply if the world is run by an authoritarian regime. They should care, however, because ultimately, their own future is at stake.

Recently, the CCP’s party Secretary Xi Jinping personally decided to suspend the $40 billion Hong Kong and Shanghai dual listing of Ant Financial, an affiliate of China’s Internet giant Alibaba. The move came after Alibaba’s founder Jack Ma, the richest man in China and a long time supporter of the CCP, voiced his concern about China’s speed of innovation being slowed by financial regulations. The listing suspension cost investment banks including J.P. Morgan and Citibank more than $400 million in fee income and, as many either borrowed money or invested their life savings in Ant Financials’s IPO, putting hundreds of thousands of small investors in a dire financial situation.

In essence, the CCP used the suspension to fire a warning shot: it will never allow any private corporation, domestic or foreign, to dominate a sector, especially the financial sector, in China. No matter how much Wall Street firms kowtow to the CCP, they will never gain the kind of market access they desire. Instead, someday, they may be crushed by the authoritarian regime they have so enthusiastically and foolishly enriched.