NORMAN — With the onset of the global recession, the public reputation of the finance sector took a major hit.
So naturally, economist Richard Sandor said, it's difficult for some to view the sector as a potential driver of public good. Sandor spoke recently at the University of Oklahoma.
“Right now, finance ranks with the world's oldest profession in terms of world recognition,” Sandor said.
Often regarded as the “father of financial futures,” Sandor was involved in the creation of interest rate futures while he served as the vice president and chief economist of the Chicago Board of Trade in the early 1970s.
OU President David Boren called Sandor “one of the most innovative economists in this country.” Sandor and his wife, Ellen, have been major players in the life of the university, he said, including donating portions of their photography collection to the Fred Jones Jr. Museum of Art.
In 2003, Sandor established the now-defunct Chicago Climate Exchange, the first voluntary greenhouse cap and trade system. Under that system, a range of corporations and other entities — including OU — pledged to reduce their carbon emissions by 6 percent. Atlanta-based financial firm InterContinental Exchange bought the exchange in 2010.
More recently, Sandor penned the book “Good Derivatives: A Story of Financial and Environmental Innovation.” The book was released in April.
Although the financial sector has been seen recently as greedy and irresponsible, Sandor said, it has the capacity to bring about major global changes. The reason is relatively simple: putting a price on something is a good way to ration its use, he said. When a commodity is expensive, people take care of it.
Creating a commodity
That idea was the driving force behind the Chicago Climate Exchange, Sandor said. The exchange turned emissions into a commodity. Any entity that produced carbon emissions below a certain level could sell their emissions rights to another entity that produced more emissions. The system gave corporations a financial incentive to reduce their emissions.
The idea was shouted down as too complicated and difficult to understand, Sandor said, particularly in the halls of Congress. But he noted that an elementary schoolteacher in New York state taught the concept to her class by handing out permits to chew gum at school and allowing students to trade them.
“I can't do it in the Senate or the House,” he said. “I should come with chewing gum.”
In the future, Sandor said, the most important commodity will be water. A combination of the effects of climate change and the depletion of surface water will make control over water resources increasingly important, he said.
Sandor proposed a system in which each person is allowed the 20 to 30 gallons of water per day that are needed for hygiene and hydration. Those who use less than that amount will be able to sell water credits to other users — for example, to golf courses in Albuquerque, he said.
Financial instruments like derivatives are only useful if they're used well, Sandor said. When they're regulated, transparent and traded fairly, they can be a tool for solving some of the world's most challenging problems.
“Derivatives are like hammers,” he said. “They can be used to crack somebody's skull, or they can be used to build houses.”
Derivatives are like hammers. They can be used to crack somebody's skull, or they can be used to build houses.”