Message No. 2: We need real bank reform

Bank sector reform sounds pretty wonky coming from a bunch of hippies sleeping out under blankets in a park, right? But it's actually near the top of the list of things protesters are concerned about. And they're right to be.

Three years after a financial meltdown that nearly took out our economy, we've really done very little to change the rules governing financial institutions, to make sure a meltdown like we saw in 2008-2009 doesn't happen again.

These protesters aren't the only ones to think that the Dodd-Frank financial sector reform law will fall short -- even if it's eventually implemented in full. Many analysts, even on the right, share this view. "The principal elements of Dodd-Frank turn out to be useless as a defense against a future crisis," said Peter Wallison, of the American Enterprise Institute, a conservative think tank.

William Isaac, a former bank regulator who was the chairman the Federal Deposit Insurance Corp. from August 1981 to October 1985, agrees that bank reform efforts have fallen short. "The Dodd-Frank law would not have prevented the last crisis, did not fix what went wrong and will make it more difficult to resolve the next crisis," says Isaac, now head of financial institutions at FTI Consulting.

In fact, Dodd-Frank may be worse than no reform at all. It creates the illusion of regulation and carries the downside of the wrong government rules without locking in the right rules, says Joseph Mason, a Louisiana State University finance professor. And Mason should know about banking regulation -- he used to work as an economist for the Office of the Comptroller of the Currency, one of our main banking regulators.

OWS gets into quite a bit of detailed analysis on banking reform. One big problem, says Gacuca, was that Washington missed an opportunity to break up the big banks while bailing them out, to prevent the "too big to fail" problem from biting us again.

"Too big to fail" means that megabanks like Citigroup (C, news) and Bank of America (BAC, news) remain so large that we'll have little choice but to bail them out again when they get into trouble the next time. Because bankers know this, they take greater risks than they should. Instead of letting banks fail or making them downsize, we bailed them out and encouraged some to merge and grow. "We made the too-big-to-fail problem even worse," agrees Kent Smetters, a professor of business and public policy at the Wharton School at the University of Pennsylvania. "We've encouraged larger banks. We should have allowed more failure."

Another complaint of OWS is that there's still too much "counterparty risk" in the financial system, one of the problems that caused the credit market meltdown. By this, OWS means that banks create and own so many derivatives that they're too exposed to each other.

Derivatives are complex financial creations, but they're basically "bets" banks and others make to balance their risks or gamble on trends in all kinds of markets. The fear here is that players won't be able to pay off if they lose.

No less an institution than the IMF sees the risk, concluding in recent research that too many derivatives have insufficient collateral backing them. IMF researchers believe outstanding derivatives may be undercollateralized by as much as $2 trillion.

One solution, says OWS, would be to have more derivatives trade through clearinghouses or exchanges, which would add transparency and reduce risk. This is an approach that many mainstream analysts, like Smetters, agree would help.

Message No. 3: Political cronyism ruins democracy

Another core complaint of OWS, says Gacuca, is that corporate contributions to political campaigns lead to crony capitalism, which is bad for democracy.

This is hardly a fringe issue. And despite being painted as a "leftist" group, OWS faults the Obama administration for being too closely aligned with Wall Street. It cites campaign contributions to Obama from banks, as well as the appointment of William Daley, who has a banking background, as White House chief of staff.

OWS also likes to cite the bank bailouts as examples of crony capitalism, another OWS position held by many on the right. Banks got help with mortgage trouble; homeowners much less so.

"We definitely share the same moral outrage at what happened," says Daniel Mitchell, a senior fellow at the Cato Institute. "Even if the banks paid the money back, they got breathing room for their own bad financial decisions, courtesy of the taxpayer."

Bank shareholders, bondholders and executives should have been allowed to take their losses in bank reorganizations that saved the good assets in the system, say many bank reform critics on the right. Instead, "the risks were socialized and the gains were privatized," says Warren. "It's not so much that people are upset around the top 1% getting rich. I think what angers people is the notion of crony capitalism. The hard-earned money of taxpayers was used to make a few people richer."

Is OWS so wrong in concluding that our democracy is broken because economic elites in banks with political connections were bailed out, while regular folks are still hurting? Warren doesn't think so.

The goofy messages

To be sure, many of the messages you'll hear from protesters are simplistic or just plain silly.

One common talking point is that student loans should be forgiven, because taxpayer money was used to bail out banks. But the economy probably won't go into a tailspin if students are held to their promise to pay back their tuition debt. It might have if the big banks had gone under.

Still, education costs have soared over the past few years, and student lending has been privatized at a hefty cost. So spare some sympathy for those who got educated the only way they could and still can't find a job.

Other rallying points include proposals for a $20-an-hour minimum wage, the establishment of base wages for various types of employment depending on how challenging the work is, and an entirely pie-in-the-sky proposal to simply divide the nation's income among all people, which would mean that everyone would earn about $115,000 a year, somehow eliminating "menial work" in the process.

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"There are reasons why some people in some jobs get paid more than others, and the idea that some politicians are going supplant the market with their personal biases is downright frightening," says Mitchell, of the Cato Institute.

But another fuzzy OWS idea, that of "empowering people," is worth keeping an eye on, because it may foretell where this protest movement is going. This concept might well have OWS morphing into a citizens lobbying group, says Gacuca. Why? "Because both sides of the political divide only respond to highly paid Washington lobbyists."

At the time of publication, Michael Brush did not own or control shares of any company mentioned in this column.

Michael Brush is the editor of Brush Up on Stocks, an investment newsletter. Click here to find Brush's most recent articles and blog posts.