Occupy movement comes to Norman
The Occupy Wall Street movement has come to OU under the more applicable name of Occupy Norman.
Nine general assemblies have taken place for the Occupy Norman movement, including a protest of about 20 participants Saturday.
The Daily invited two finance faculty members to address some of the economic issues highlighted by the protestors.
Both professors have extensive teaching and research experience in North America and Western Europe – two areas impacted during the global financial crisis.
Evgenia Golubeva teaches investment and international finance.
Bill Megginson is the chairman of finance at OU.
The Daily: During the first general assembly, Norman citizen Brian Husted proposed “ending options/futures trading.” Is it possible to have an equity market without derivatives?
Golubeva: The derivative market grows as people needed to manage risks arising from the increased volatility and as intellectual advancements were made in the field. Derivatives can be used to hedge and to speculate. Usually people get the hedging part, but they believe that the speculation part is evil as it destabilizes markets. However, speculators provide liquidity and price discovery to the market.
Megginson: It is certainly possible to have a well-functioning stock market without organized futures and options trading; this was the state of nature from the beginning of stock exchange trading during the 1600s until the founding of the Chicago Board of Options Exchange in 1973.
However, banning options/futures trading would be counter-productive. Both types of derivatives have grown massively over the past 40 years, overwhelmingly because they allow businesses and individuals to hedge legitimate business risks relating to fluctuating commodity prices, interest rates and currency values.
Like money, guns and ideology, derivatives are value-neutral; they can be used very effectively for crass or speculative purposes.
The Daily: One campaigner, Alaric Moore, has proposed “ending usury” to stabilize the market. Both the Bloomberg “Businessweek” and the International Monetary Fund have hinted that the Islamic finance system has shown stronger resilience during the global financial crisis. Is this because of the lack of usury? Or is this because the countries with an Islamic finance system have little exposure and connection to the financial market in the West?
Golubeva: I would only speculate if I discussed the degree of its connectedness with the financial markets in the West, but that’s not the point. “Weathering a crisis” is the wrong gauge to measure the overall effectiveness of the financial system. There are many other facets to consider besides immunity to systemic risk, but even that is not the point. A social institution, such as the education system, healthcare and the financial market, is a product of culture. People have one system or another because that’s what has worked for them. Just because it wouldn’t work for you and me doesn’t make it wrong, bad or inefficient.
The Daily: Which area in the financial market would you like to see a reform in the most?
Megginson: Rising capital standards for large, systemically important banks would prevent future crises. Limited excess compensation for bankers would also help more than any other single reform.
Banks oppose higher capital standards because these directly limit risk-taking and reduce profitability, but they are simple and effective tools for maintaining competition and financial stability.
These standards have been raised somewhat since 2008, but changes must be agreed upon globally to prevent one country’s banks from gaining a competitive advantage.
The Daily: A lot of Occupy campaigners are dissatisfied with the extent of corporate influence in politics. What laws can be implemented to fill this loophole?
Golubeva: Regulators and politicians sometimes don’t know what they are doing because they lack elementary knowledge and expertise. Corporations need to make their cases heard. This is a fundamental need. It is not going away unless we have really wise politicians that create laws that are inherently fair to everybody.
I am from Russia, and I have seen corruption at its worst. Unfortunately, it is a tough enemy to defeat. You can make a case for stricter governance and more disclosure. However, control is not effortless. The cost of exercising control must be weighed against the benefit of reduced misalignment of resources.
The Daily: Occupy Norman has reiterated in its general assembly that it would not propose any specific policy change. Do you think its protests would eventually lead to any measurable change in the financial market?
Megginson: Probably not. Instead these proposals are more likely to end up as “instruments of political combat” in the upcoming election cycle, with the Democrats embracing, cautiously, some of the less extreme proposals and the Republicans rejecting all of them. Given the current and likely future make-up of the U.S. Congress, the chance of actual passage of any of these proposals is nil.
What the protests might well prompt are prosecutions of some bankers for real or perceived misdeeds during the Bubble Years. Most of these will be unsuccessful – since most of the shadiest practices of the era were in fact legal, if very reckless – but would certainly be wildly popular nonetheless.