It’s entirely possible, and even likely, Occupy Wall Street is merely a temporary flare-up of anger—a venting of frustrations over weak economic conditions and high unemployment. But it’s also possible it turns into something more. It could even drive changes to our financial and political systems. We’ve seen what similar demonstrations have done in the Middle East. In case of the latter, it’s probably a good idea to find out what this group is trying to accomplish. What policy reforms does it stand for? What are the respective implications to the market and investors?
Who Is Occupy Wall Street?
Whether it’s a movement or a fickle populist protest, Occupy Wall Street has caught the media’s attention. The group appears to be a mishmash of students, unemployed laborers, and political activists. I was initially dismissive after seeing coverage of wildly dressed protestors making some fairly outlandish comments. But I became intrigued, particularly after the protests grew in popularity.
To be sure, the group lacks any real centralization and its demands are vague. It has called out everything from political contributions, corporate structure, workplace equality, to environmental protection—the diversity of demands suggests it is still a voice of frustration rather than a focused effort (you can find what appears to be the most recent declarations here: OccupyWallStreet). And that’s the first thing I noticed—this isn’t a flat out assault on Wall Street. Financial firms are certainly part of it, but they serve mostly as a poster child for the group’s overarching goal: economic and political equality. In fact, the unofficial slogan is “We Are The 99% that will no longer tolerate the greed and corruption of the 1%.”
What’s the Impact For Investors?
One of their most prominent agenda items seems to be political contributions. Here they claim corporations exert too much influence over government, and as such their ability to provide campaign funding should be eliminated. But again, details are vague. To promote fairness they also demand caps on individual contributions and those from the candidates themselves. The main goal, of course, is to reduce conflict of interest in our political system. There is much I agree with here, but the subject matter is nothing new. Political campaign contributions have been a source of heated debate for decades, and the ability to make any significant reform would take a much more concentrated effort than Occupy Wall Street can currently give.
The rest of their “official” declarations can be better described as an intangible set of ideals. It’s possible the group finds its focus and develops them into viable policy recommendations, but at this point it’s not worth speculating. So if the group doesn’t simply tire out and go home it will probably lend support to existing policy and regulation proposals – likely those surrounding economic equality. There are currently two such proposals floating around Congress: the “Buffett rule” and the “Volcker rule.”
Occupy Wall Street has already effectively endorsed the Buffett rule. They even staged marches to homes of prominent wealthy figures to demonstrate their dissatisfaction with income inequality. Details have yet to be finalized, but the proposal itself suggests increasing taxes on those earning more than one million annually. The idea makes sense, and the concept was proposed by billionaire Warren Buffett who told the public he pays less in taxes than his secretary. Such a proposal would likely have a benign impact on markets and actually boost government revenue. But it’s a slippery slope. It can open the door to further tax hikes and result in all sorts of financial shenanigans to avoid the rule. If severe enough, it could even drive top income producers to lower tax rate countries.
The Volcker rule is named after former Federal Reserve Chairman Paul Volcker, and its purpose is to place additional restrictions on banks to prevent another financial crisis. Specifically, the proposal hopes to ban proprietary trading and hedge fund ownership in excess of 3 percent for any bank insured by the FDIC. Longer-term, we should in fact look for ways to better insulate FDIC insured banks, but now is not the time. The short-term market impact would likely be negative. Banks are struggling. Most have even announced sizeable job cuts. And what is this proposal, really, but a limit on the number of ways banks can generate profit. If these channels continue to be choked off, banks will have no choice but to cut costs (i.e. jobs) or find profit elsewhere (i.e. higher fees). Neither are desirable outcomes.
This should sound strikingly familiar. In 2010, the Dodd-Frank bill was signed into law which, among other things, capped the level of fees banks could charge merchants for debit card transactions. The problem is these fees represented billions in revenue, meaning banks couldn’t just step aside and watch the funds disappear. The result was Bank of America, and many others, raising fees on customers. And does the economy really need banks making their services more prohibitive to consumers right now?
Again, the magnitude of any market impact is unclear. But this definitely represents another example of banks being used as whipping boys for current economic woes – a cause Occupy Wall Street is sure to get behind.