March 1, 2010
by Annelise Riles

After Balance: A New Way of Thinking About Market Reform

How can Markets be Reformed (and What is Wrong with Existing Answers)?

A crisis of ideas

We are facing a crisis of ideas about what to do about financial reform.  Policy debates recirculate endless versions of the same old alternatives–market self-regulation self correction versus government regulation–in the guise of argument about what is really the same old toolkit of policy interventions: taxes on certain kinds of transactions (eg the Tobin rule, recycled from the 1960s)? An outright ban on certain forms of trading or investment (eg the Volker rule, recycled from the 1980s)? capital adequacy requirements (eg a proposed Basel III that largely just raises the bar on Basel II)? more vigorous prosecution of insider trading (same regime, just more of it) ? New regulatory institutions aimed, for example, at protecting consumers (a return to the solutions of the 1930s)? At each stage proponents of one approach or another highlight the legitimate merits of their view and the legitimate problems with the alternative view.  Separating banking and investment activities is the only way to protect innocent third parties–no, separating banking and investment would not have prevented the problems of 2008.  Moving derivatives trading onto exchanges, or increasing capital adequacy requirements, will prevent future instances of the “domino effect”. No, any such rule can always be circumvented through clever accounting or derivatives engineeering. And on and on.

At this stage several things are clear. First, both positions in the free markets-versus-regulation debate are right.  Markets do not always self correct, but regulators do not always make wise decisions.  There is no perfect point of balance, no way to square the circle.  Lets face it: there is no Big Idea for how to rebuild and restabilize the economy. We are going to have to live with a market out of balance.

A simplistic debate about human motivation

One recurring feature of this debate is its worry about human motivations on all sides.  On the one hand, there is a great deal of worry about government officials: the view is that these basically selfish and often irrational actors need to be properly controlled–through transparency and accountability mechanisms like Congressional hearings–to keep them from becoming “captured” by certain large financial interests (consider the debate about whether Treasury officials are too close to Goldman Sachs for example).  On the other hand, there is a great deal of worry about market participants:  motivated by selfishness, irrationality, passion, herd mentality, and so on, they pursue short term personal profits at the expense of long term gains.  They too need to be properly controlled–through limits on bonuses, or bonus programs that incentivize long-term profits, or through criminal prosecutions, or firewalls that limit traders’ access to particular kinds of information.

This view of everyone involved as selfish, brutish and irrational is just a flip flop of the old view of market participants as brilliant wizards of finance embodying the collective wisdom of the free market on the one hand, and benevolent regulators bringing the wisdom of their elite educational training to the table in the service of the public welfare.

From the point of view of state of the art social science, these caricatures seem remarkably inadequate. Sociologists, anthropologists and psychologists know that there are few real angels and real devils in the world; most of us are a complex bag of motivations, ideas and aspirations that often we ourselves do not fully understand.

But these caricatures get one thing right: Markets are made up of people–real people, and their ideas, their tools, their strategies, their skill sets, their contacts and relationships. Nothing less, nothing more. Every possible form of market intervention–from monetary policy to criminal prosecutions–is only effective if it somehow causes a change in human behavior.  So we need a more practical approach to market stability that works for real people in real market situations.

Consequences of the financial crisis

Meanwhile, if we turn away from the headlines on the front or business page, there are a set of other stories proliferating about the “consequences” of the financial crisis on people’s lives. In the United States, unemployment and underemployment (particularly among young people), housing foreclosures, the reduction in real wages and job insecurity even among the employed has generated confusion and deep anxiety among many people at all but the very highest echelons.  Popular anger at both Wall Street and the government has spawned growing nationalism, far-right activism, and even calls for “revolution”.  In Japan, as Yuji Genda has discussed, suicide is up, and for the first time most Japanese do not believe that life for their children will be better than their own.  Young people do not see the point of taking up the kinds of careers their parents had.  Mid-career people are facing layoffs and a loss of a sense of purpose about their work.  The question of what to do about a pervasive hopelessness in the market and society has become a serious policy problem.

Out of Balance

In response, the pundits, the preachers, the career consultants and the self-help experts descend on the public with a singular message: Balance.  As an employee, you are responsible for maintaining a proper work-life balance, they tell us, and you also need to balance the increasing demands on you brought about by downsizing.  As a consumer, you need to get what you spend in balance with what you earn.  Moving from consuming to saving requires emotional balance, Suzi Orman says.  As a citizen/taxpayer, you need to balance the short-term injustice of financing Wall Street bailouts against the long-term benefits of economic stability, Obama reminds us.  This call to balance often has a moralistic tone: we feel guilty, as though it is our fault, when things are out of balance.  It is also an attractive fantasy–the promises of everyone from Oprah and her New Age gurus to the Golden Door Spa to the latest management consulting paradigm paints a picture of a perfect state that is just around the corner, if only we were a little more disciplined about our exercise routine or a little more efficient about our task management.

This kind of balance talk–whether it is about balancing the benefits and the costs of government intervention in the market, or balancing the interests of different economic constituencies in defining economic policy, or about entreating employees to balance the demands of their job, is ineffective and worse, irresponsible.  It is irresponsible because systemic problems–the mortgage crisis, or the collapse of the derivatives market, or the health care crisis–are passed off as attributable simply to individual failure or lack of proper motivation–greedy consumers, or greedy traders, or individual obesity and lack of exercise.  It is ineffective because it directs our attention away from the search for new alternatives to market stability and growth and towards a witch hunt for the guilty party–the corrupt bureaucrat, the rogue trader, the luxury-addicted consumer. Economists understand that market equilibrium is a kind of fictive assumption–something useful to think with but impossible and probably not even desirable (in arbitrage, for example, the moment of equilibrium is the moment at which there is nothing left for market participants to do since all the arbitrage opportunities have been taken).  This impossible quest for balance, this endless search for the perfect way to square the circle between work and leisure, for example or between government regulation and industry self-regulation, gets in the way of our noticing how markets actually cope in a practical way with the real imbalance that pervades every aspect of market institutions and activity.

So What to Do?

We need a new way of thinking, and a new way of taking personal responsibility for the market.  See my post here on what lawyers can do.

March 1, 2010
by Annelise Riles
1 Comment


What role for legal professionalism?

At its core, the debate about financial reform is about how to change real people and their daily decisions–regulators, traders, consumers, and so on.  Is there a role for legal professionalism in this? How does day to day legal practice bring about change, and what kind of change can it bring about? What alternatives might these changes already be offering to the search for new regulatory architectures? And what about the motivations and ambitions of legal professionals ourselves–how do we keep going? How do we choose what course of action to take, given that the consequences of our actions can never be predicted entirely in advance?

We are not used to thinking about day to day legal practice–the mundane stuff of client relations, the technical stuff of document discovery or production–as the stuff of “stabilizing the markets and changing the world”. Ask most lawyers how they make a difference (or what is most exciting or stimulating about their professional lives) and they might instead point to other work they do, whether as pro bono advocates, or on rule-making committees, or as board members of other public interest causes.

  • Taking Individual Action:  Specific actions by legal professionals –to pursue one legal vehicle for a merger over another, to devote extra time to educating a client about best practices of document retention, to propose a different phrasing of company policy for the company’s website– have real market consequences that often go far beyond the particular issue or client at hand.  Put another way, how lawyers describe specific aspects of market institutions such as firms or regulatory schemes–in dealings with their clients, in filings, in training, mentoring and work on behalf of the profession, in management contexts–actually shape the nature of the market and the confidence of investors.  In a sense this is not news: most of us go into our work with the hope that it can have a positive effect.  But the role of lawyers is still too little acknowledged in discussions of financial stability.  And of course, if lawyers can make a difference for the better, they can also make a difference for the worse.  We will discuss how theories, vehicles and practices in financial law affected the crisis of 2008 what implications these have for each of our responsibility as professionals for promoting financial stability going forward. Lawyers’ ways of arguing, thinking, structuring a conversation do often make a difference.  This difference can add up, collectively, to an emerging market vibrancy built one relationship at a time.
  • Motivations:  When it comes to our own interventions in the market, each of us occupies a range of positions along the continuum between faith-based activism and self-doubt.  This has never been more true than at this moment as current market conditions are leading to a massive rethinking of basic principles not just in Egypt but in markets around the world.  How do each of us cope with having to make decisions in an environment of conflicting demands and lack of clarity about what the consequences of our actions might turn out to be? How do legal tools motivate us and others in a situation in which there is no simple answer as to what is best or worst practice? In order for lawyers to contribute to market stability, we need to build in our own techniques and practices for ensuring that we also have time to think independently–and for staying motivated in an inherently unbalanced environment.
  • Slowing Down and Making Room: In an environment in which there is not always an obvious right and wrong approach to market stability is, one of the important contributions of legal advocacy and advice is simply to make space for market participants to think independently.  The severity of the financial crisis had much to do with the herd mentality in the market–with replicating the same business model or investment strategy from one firm to another and one market to another without pausing to think independently about the wisdom of the strategy.  But the moment of legal advice is one of the rare moments at which market participants do afford the opportunity to stop and think about the consequences of their actions.  At those moments, legal tools and arguments can given market participants the confidence and the breathing room to think independently, and hence in the aggregate can help to preserve a diversity of investment strategies that in turn might bring greater stability to the market.  But too often, lawyers have been salespeople for cookie-cutter legal solutions that contribute to the herd mentality and undermine diversity of strategy. Likewise, lawyers can help to set in place institutional processes and procedures, or intervene in their dealings with clients in specific contexts, in ways that build breathing room for thinking about long term and collective consequences of short-term actions and about alternative courses of action–slowing down the process of declaring a condition of default, or developing a strategy for reconfiguring contractual or compliance obligations in light of rapidly changing circumstances, or encouraging a client to give greater institutional reflection to the public statements it makes about its operations. Doing this well ultimately requires creating a structured way to make room for market participants’ own doubts about their actions, rather than papering over these.  At the grandest level, this might actually lead to more responsible thinking about whether short-term strategies serve long-term goals or even about the collective consequences of individual strategies.


Lawyers have a special role to play in financial stability.  They already occupy a strategic place in the chain of market transactions–as both insiders/advisors and as translators to wider constituencies, facilitators of transactions, and coaches for a structured form of reflection on the larger consequences of individual market activity. Lawyers already have at their disposal the day to day professional tools and techniques for inserting stability into the system, one transaction, one investment decision, one disclosure at a time.  This fact–and hence the special responsibilities of lawyers not so much to the ethics of the lawyer-client relationship, but to doing their part to create a more stable market “commons”–rarely gets the attention it deserves from regulators, from commentators, even from lawyers themselves.

What would market reform look like if, instead of investing all our political energies in a policy-driven search for the perfectly calibrated regulatory architecture, we focused more attention on developing and re-directing the practical legal techniques that are already contributing in practical, day to day ways to market stability? This is a radically different vision of market reform–one that places lawyers in private practice at the center, rather than on the periphery of market stability. But if it is a radical change in perspective, it requires no new laws, no new policies, not even a change in these lawyers’ existing roles.  It simply requires that all of us individually take action to exploit the options and possibilities we already have, as part of our professional portfolio and repertoire, every day, to create more breathing room, more space, and hence more practical stability in the system. The tricks and techniques and strategies for this kind of legal intervention will vary from one practice to another. As such this kind of reform must be a very personal project of the individual professional. At the same time, it can be comparatively instructive and motivating to think about how to go about doing this in conversation with others.

Could we think of this as a market movement, along the lines of the other movements that have traditionally been more social or political in character? In all such movements, the actual direction of progress is always unclear, and for everyone involved, ambivalence, mixed motives, and compromised interests are par for the course.  Our own professional doubts about how we might “balance,” for example, a desire to do well with a desire to do good, or about whether the “right” thing to do is to encourage or discourage a certain form of risk-taking on the part of clients, are not only inevitable, they are actually the engine of such a movement.  In such a condition, as we saw, hope comes from creating small opportunities for change, small spaces for reflection, and then letting those opportunities unfold.

Retooling is ultimately not only for lawyers, of course.  It is a method of political and economic activism that is available to virtually anyone with a specialized skill set–from financial trading to parenting and everything in between.  The core approach is this: First, some skepticism about projects that promise to change internal motivations (our own or others)-to turn market cheaters into rule-followers, to turn racial bigots into enlightened progressives, to “motivate” children or workers who lack motivation and so on. Second, an unwillingness to put all our hope in grand structural reform–a new labor law, a new financial architecture and so on. Third, a rejection of the fantasy that if we really want to make a difference we should be somewhere else–we should be academics, or we academics should be in the real world, or we should run for political office, or we should start an NGO, or we should be employed in a different firm or a different industry, etc etc… (the now popular version in Japan is the fantasy of making a difference by abandoning city life and becoming an organic farmer). Instead, retooling involves deploying the skills and tools we already have, in the context in which we already find ourselves, in ordinary ways that reshuffle the deck just a little in order to to open up opportunities for different individual and institutional choices, to create space for reflection, and even to make room for fun.

(co-authored with Hirokazu Miyazaki)
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