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Derivatives Reform Idea: Let Main Street Join Party

NEW YORK ( TheStreet) -- One Ivy League professor has an interesting idea for derivatives reform : Instead of restricting the market to Wall Street whizzes, let average people bet against themselves, too.

Derivatives have been a keystone of the financial reform debate, and with good reason. Some types of derivatives were "synthetic" bets that worsened the pain of the housing crisis for most investors and taxpayers, while lining the pockets of a handful of Wall Street titans. Other types are plain-vanilla contracts that help global corporations like Coca-Cola (KO) hedge against currency fluctuations or help companies like Delta (DAL) protect themselves against huge swings in commodity prices. Still other derivatives act as insurance against bond default, helping troubled companies survive by issuing new debt.

Robert Hockett
Cornell professor Robert Hockett

By and large, those nuances have been lost on taxpayers and their politicians, furthering the divide between Main Street and Wall Street. People hear credit default swap, and think AIG's (AIG - Get Report) $180 billion bailout . They hear collateralized debt obligation and think of Goldman Sachs (GS - Get Report) allegedly defrauding investors. The preciseness and accuracy of those thoughts is less relevant than the emotions they stir.

But Robert Hockett, an expert in financial law and economics at Cornell Law School, can envision a day when Joe the Plumber buys a structured investment vehicle to prepare for a time when broken toilets are few and far between.

"We have derivative contracts and synthetic derivatives engineered to enable people with financial sophistication to hedge against financial loss," says Hockett. "Well, if you worry about possible fluctuations in the price of your house, what if we developed derivative products so that people who lived in certain areas could hedge against loss in their houses? Or if you are in a particular occupation - a lawyer, say - and let's say incomes of lawyers wax and wane. What if we could come up with a financial instrument that would enable these lawyers to hedge against changes in their lawyerly incomes in certain areas or times of year or whatever?"

Hockett's view is atypical and perhaps slightly controversial. He acknowledges that it isn't likely to happen any time soon, saying we must first put in place "a sane system of financial regulation," and better educate the public about finance and economics.

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