SPEAKER 1: It's my distinct thing privilege this afternoon to introduce these two distinguished professors. They're going to be presenting on Hope In Law and the Economy. And they've done some collaborative research on the financial markets, I guess, at a very timely time.
Professor Annelise Riles received her JD from Harvard Law School and a PhD from the University of Cambridge. She's the Jack G. Clark Professor of Far East Legal Studies, rather, at the law school and Director of the Clark Program in East Asian Law and Culture there as well. She is not only a lawyer and a professor of law, but a professor of anthropology and anthropologist. Her research interests include the anthropology of the state, institutional knowledge, practices, and legal ethics. Her first book was entitled The Network Inside Out and concerned knowledge practices among United Nations bureaucrats and non-NGO activists, non-governmental activists working on gender issues in the Pacific.
Our other presenter is-- you're going to forgive me on the name, Professor. I'm going to try-- Professor Hirokazu Miyazaki. And he has a PhD from the Australian National University. He's an Associate Professor and Director of Graduate Studies. And he's an anthropologist. His areas of interest include the anthropology of knowledge, risk, trust, hope, utopia, and anti-utopia.
His recent work has been driven by a very simple question. How do we keep hope alive? Well, you must then speaking to someone in Washington DC [INAUDIBLE]. He's interested in this question because of ongoing efforts to claim and even instrumentalize the category of hope in a wide spectrum of genres of knowledge from psychotherapy to conservative and progressive political thought.
His first book is The Method of Hope, Anthropology, Philosophy, and Fijian Knowledge. It was published by Stanford University Press in 2004. It's a study of the Suvavou people's long-standing hope to regain their ancestral lands.
So, again, I'd like to welcome both our speakers here. And I thank them for giving us this opportunity to hear about their research. Professors?
ANNELISE RILES: Well, thank you very much for coming. It's really a pleasure to talk with you about our research. And I imagine that many of the things we're going to be talking about are things that many of you know a great deal about. So I'm sure you can help us a lot with this project.
As all of you know, the subject of hope and hopelessness has received a lot of attention recently in this country, of course, with our president having made this very much the focal point of his political campaign, but also elsewhere in the world. And the gentleman over here is Ryu Murakami, one of Japan's most famous novelists, who wrote a book that absolutely rocked the political and cultural scene in Japan, a book called Exodus in a Country of Hope, in which he argued, basically, that Japan is a country that has everything but hope. And this really touched a nerve in Japan in terms of a sense that people had lost their hope, that there was a problem of hopelessness among youth, in particular, but among also older people who felt that their lives had not turned out the way they had imagined that they would as young people and so on.
And so at least in Japan, this has initiated a widespread policy debate about what kinds of policies and what kinds of laws, what kinds of institutions, cause people to be more hopeful and, of course, in turn, to be presumably better, more productive members of society. And, of course, something similar is happening in this country. Now, all of you being here probably suggest that this is also a question that's somewhat on your mind.
How do people gain the ability to go on? Where does their hope come from? And also, where does hope in the market come from in a time in which we all know things are not going always in the right direction?
And we're going to give you today just a tiny taste of some really complex research at the intersection of law, anthropology, and economics, as well as some other disciplines about this. But I want to warn you at the outset that what we have found in this project may not fit with some of your intuitions or common sense understandings of what hope is and where it comes from. In fact, I imagine that for the first 15 minutes of this talk, you may be wondering if what we're talking about has anything to do with hope at all. And I hope that by the end, you will find that it does. But I've just got to warn you of that. OK.
HIROKAZU MIYAZAKI: Yes. And today's presentations showcases a result of our ongoing collaboration with the University of Tokyo and, particularly, University of Tokyo's Institute of Social Science. And this collaboration is undertaken within the framework of a formal agreement Cornell University entered into in 2007 with the University of Tokyo. And participating Cornell entities include the East Asia Program, a campus-wide program devoted to the study of East Asia, the Clarke Program in East Asian Law and Culture in the law school, and the School for Industrial and Labor Relations. So it's a very broad coalition of social scientists and, particularly, humanistically-oriented social scientists at Cornell involved in this project.
And the chief goal of this collaboration is to really establish a new model for international collaboration in the social sciences, particularly related to transnational issues, common issues, between the two countries. But really the aim is to establish a model for an equal partnership between Japan-based social scientists and US-based science social scientists. This is really kind of new in a sense that, in the past, Japanese social scientists tended to import models from the United States.
Whereas, American social scientists would treat Japan as just a case study and looking for kind of facts there. So our project is really to establish a kind of mutually enhancing kind of relationship. And we are into that co-production of our social scientific models about common issues across the Pacific and related to law, labor, and economy. And we really believe that this is the way to go for this century and this kind of relationship is where the future of the university as a global institution really lies.
ANNELISE RILES: So we've already actually done quite a lot in this project. We've had three international conferences, seven books published, and so on and so forth. And there are many, many, many social scientists involved in this project, both on this campus and at the University of Tokyo.
What we're going to be talking about now is our little pieces of this broader project, which come out of 10 years of ethnographic research we did in the financial markets-- Hiro working with traders in the market and myself working with lawyers who paper the trades, as they say. So here, why don't you talk a little bit about the trader side?
HIROKAZU MIYAZAKI: Yes. And my initial degree in anthropology was based on research in Fiji Islands in the Pacific. But after completing that degree, I completely changed my orientation and started studying finance as an anthropological subject. That was back in 1997.
The reason that I was interested in finance had much to do with the financial crisis that, at that time, was affecting East Asia, particularly the Asian currency crisis. And that was followed by another crisis in the US triggered by failure of hedge fund, you may recall, and the long-term capital management and, after that, Enron, and et cetera, et cetera. So finance became suddenly sort of something that really affects our life in a really intimate way.
So we thought it'd be an interesting subject for anthropologists to really explore for us. And we were two of the early anthropologists to go into the field. And no one believed that we would be able to study folks in the financial industry.
But I have conducted anthropological field work among Japanese derivatives traders since 1997. And, originally, I started with this particular group, a rather small group, of 20 to 30 Japanese pioneers in derivatives trading. And I have followed their professional careers and personal lives ever since.
And I am now completing a book called Arbitraging Japan, Traders As Critics Of Capitalism. And many of the traders I have studied are specialists-- oops-- in a form of trading called arbitrage. And probably many of you are familiar with this notion. But I will just quickly explain what that is.
Arbitrage is really the most important theoretical construct underlying modern financial economics. Almost all of asset valuation models are based on the idea of arbitrage or arbitrage-like thinking processes. So it's a major construct. Without this, really modern financial economics, which used to have quite a bit of persuasion till recently, wouldn't have existed.
But also arbitrage is a widely practiced trading strategy. And it's a trading strategy that seeks to make profits from differences in the prices of a single asset traded in two different locations or two economically related assets by simultaneously selling high and buying low. So examples of economically related assets would be baskets of stocks and futures contracts on those stocks.
But in practice, arbitrageur's craft really lies in finding unexpected sort of combinations of assets that they could arbitrage. So they are specialists in fabricating things they could arbitrage. And so their craft has been called an art of association. So they are experts in, like, seeing connections between things, assets particularly, that no one else, say, connected.
But what's interesting is arbitrage as a concept and a trading practice is based on a fiction or as if notion of no arbitrage. To discover an arbitrage opportunity, you have to assume that there is a condition in which arbitrage is not possible. And that's the hypothetical condition from which arbitrageurs sort of calculate backwards to find an arbitrage of all kind of relationship between assets.
And also, in theory, this condition no arbitrage realizes as a result of the work of arbitrage. And that's the kind of core of the theory of arbitrage, eliminate arbitrage as arbitrage opportunities until the point at which no arbitrage is possible. That's a kind of theoretical kind of stance that underlies the practice and the theory of arbitrage.
And arbitrage is often regarded as a risk-free trading as opposed to speculation. Open any financial economics textbook, and you see the three categories for market participants-- arbitrageurs, speculators, and hedgers. And these are very important categories for financial economics and, also, the trading practices.
But arbitrage is often regarded as risk-free trading. But arbitrageurs are actually deeply ambivalent about this idea. And as you can imagine, no form of trading is risk-free. And arbitrage is no exception.
But yet, arbitrageurs insist that they are arbitrageurs, and they are not speculating. They are not taking active risk. And they have liked to kind of entertain that posture [INAUDIBLE].
So in practice, my ethnographic research shows that from arbitrageurs point of view the difference between arbitrage and speculation has nothing to do with their respective approaches to risk. But it has more to do with different kinds of belief embedded in these two practices. And arbitrageurs are almost sort of universally kind of ambivalent about what they do.
And they are really ambivalent about the category of arbitrage itself. By ambivalence, I mean that they are really firmly believing in arbitrage, while knowing that arbitrage is a fictional and theoretical construct. So this co-presence of belief and disbelief really differentiates arbitrageurs from speculators in their own perception.
So the key financial technique of arbitrage, I would say, is ambivalence. And this is kind of surprising in a sense that at the heart of financial markets, at the heart of financial economics, we tend to associate with reckless sort of greedy kind of practices there is this commitment to ambivalence. And from arbitrageurs point of view, the possibility of arbitrage really rests on really maintaining this ambivalent sort of approach to the category.
And they often say arbitrage works as long as you believe in it. But the flip side of that is that they know that they are believing in something they actually have deep doubt about. But yet, they need to believe in it if they insist on this form of trading.
So I'm really interested in that role ambivalence really plays in their work. And, in fact, this posture, that of ambivalence about their own work, is critical to the way they are able to continually engage in this form of trading. The daily kind of commitment to ambivalence really enables them to see simultaneously this fictional condition of no arbitrage that allows them to find arbitrage opportunities in the present and an endless chain of arbitrage opportunities in the future.
So if you just believe in it, you don't really see the endless chain. You only see the no arbitrage situation. But because of this ambivalence, you see both. And that allows them to continually engage in this form of trading.
So what's interesting here is arbitrage is based on a commitment to-- sorry, the ambivalence is based on a commitment to this technique known as arbitrage. And many traders call this kind of commitment discipline. So central to their work ethic is that they need to kind of discipline themselves to the extent that they do not deviate from this ambivalent posture.
Otherwise, there will be just simply speculators. And then that tend to kind of lead to disastrous fate for themselves as well as for society. And interestingly, for the Japanese arbitrageurs I studied, arbitrage was not simply a technique for trading, but also a technique for living.
They have extended the idea of arbitrage and associated sort of ambivalence to professional and personal decisions they have had to make from career change to marriage. And so, sort of they are quite ambivalent about all sorts of things. But what's interesting is in recent years-- I've been studying these people for over 10 years. So I now see it's kind of a quite consequential change in the way they approach their work.
In recent years for the last couple of years, what they say and what they do kind of have changed. And this is, again, not particularly related to what I'm saying. But this is kind of interesting background.
Nikkei 225 Index has dropped over 28,000 points, over 75% of the value, over the last two decades. And 1982 is a kind of critical year. The derivatives trading was introduced to the Japanese markets in 1987, but in the securities markets.
And 1982 was the height of the economic bubble, stock market bubble. And that was when arbitrage was a very easy game. And now, the traders I have studied just have stopped trading, have lost kind of interest in arbitrage and almost kind of lost faith in this technique altogether.
And that loss of faith in arbitrage has led to the loss of the ability to find and fabricate sort of comparable things not only in the market, but also in their lives. And what they say has become a little bit more deterministic than before. So they would say that they actually have been arbitraged themselves.
Or like, the last few months, they've been saying that the finance is over. You know, there's nothing interesting in this field. And their career is over.
They've been always interested in a kind of spiritual and extraterrestrial kind of matters. But they only talk about those things and talk about the ends of capitalism and so forth. They been always interested in ends of capitalism. But they were also doing lots of capitalistic things as well before. But now, sort of with a loss of faith in arbitrage, they also lost this sort of double vision inherent in that technique.
ANNELISE RILES: Right. OK. So now, I'm going to switch gears and talk about the lawyers in the market. And, you know, it's interesting how distinct these two groups were. I mean, for one thing, our research schedules were completely different.
Hiro had the exciting work. He would go start his research at about 5:00 PM and finish at about 6:00 AM every day after going to all kinds of places all night long. The people I worked with were all kinds of lawyers in the market from people that we would characterize more as maybe more like paralegals to lawyers working in law firms, the lawyers working in-house at some of the big banks, to regulators to academics and so on-- the various kinds of players.
And these people do not stay out late. They tend to work from, you know, 8:00 AM to, you know, more like office hours. So we had very different research lives.
I've just completed a book about this. And I guess, you know, hearing you talk, Hiro, I mean, I would say the main difference is that I would say that the people I work with have not lost that kind of hope in their technique. I'd be interested to hear from the lawyers in here what you think about that. But there's a real difference there.
OK. So I thought I would just give you a tiny slice of the kinds of legal questions the preoccupied my informants. And, of course, as you can imagine, the legal issues surrounding derivatives trading are very, very complicated. But here would be one example.
When you trade in over-the-counter derivatives, you pretty much most of the time have to post collateral to do so. And so there are a whole series of legal questions about the governance of that collateral. First of all, what rights does the collateral taker, the bank that takes collateral, have in that collateral?
Can it go ahead and use it for something else while it's holding onto it in the meantime? Of course, you understand that if it turned out that the bank that posted the collateral couldn't fulfill its obligations, the collateral will take or could use that collateral to fulfill those obligations. But what about in the meantime?
Can it use it for something else? What if there are certain things that have to be done to maintain the collateral, maybe pay dividends on it? Maybe it has to be kept somewhere and there are fees associated with that. Who is responsible for that-- and many, many, many more issues.
And then what law governs those things, right? The dreaded field of conflict laws in law-- you know, are these issues of Japanese law? Are they issues of US law?
How would you know? Well, you might ask, well, where is the collateral? Well, what is this thing? It's a bunch of numbers on a bank account.
So what does that mean? Where is it physically to begin with to determine what kind of law will govern-- very, very complicated questions. And here's what's really interesting.
The lawyers involved in this have what seems like a just unbelievably simple solution to these very, very complicated questions. The International Swaps and Derivatives Association, which is the sort of trade organization of the swap dealers mainly, has put together this literally preprinted document. Has anyone in here dealt with that document or seen it?
Yeah. OK, great. It's a preprinted form that you fill out. And it includes a clause in there that basically says, just to put it in simple language, the party that takes the collateral has all the rights, end of story, period, all of them. Any rights you can imagine, they've got.
And the law of-- and then you literally circle the jurisdiction, New York or London-- applies to this transaction end of story, right? Now, as a law professor and I think as a lawyer, you would say, well, the questions are so much more complicated than that.
How can you simply assert this? That can't be the end of the story. I mean, these things must be much more complicated than that.
But what's interesting-- and this is really the connection to what Hiro was saying-- is that, of course, the lawyers involved in these transactions know that all of those issues can be opened up at any time. They can be litigated. They can be negotiated around. There could be new arguments, new theories.
But they also hold to the idea that you would want to have that simple argument and make it work for you. And so, again, like the ambivalence Hiro was talking about, there's a sense of taking both of those positions at once-- wanting to have the simple, concrete, end of story argument and also knowing that it's all much more complicated than this.
Now, doctrinally, one way of thinking about this is to say that what they're really doing when they say the party that's holding the collateral has all the rights, end of story, is that they're saying it's as if the moment at which the first party is screwed up and wasn't able to meet its obligations has already arrived. It's like as if we're already in the future and that moment has come. And we'll pretend.
And, of course, they know that's not the case. But that's sort of the reasoning here. And, of course, this is something that they both work with as a fiction and know not to be the case. And it's more like a kind of mutual agreement between the parties to just act as if the problem has gone away for the moment.
Now, this idea may sound really crazy to you. And you think, how could this be the case? But it's actually all over the law. It's all over every area of law.
And, in fact, I would be so bold as to suggest to you that it's probably the main technique of law itself. I'm not the first one to say this. Henry Maine said it and thought it was great. Jeremy Bentham said it and thought it was a horrible thing about law.
But, basically, this idea of the legal fiction of something-- a factual statement that you assert while understanding full well and also understanding everybody else understands that it's not the case-- is actually the fundamental strategy or technique of legal expertise. So take a simple one you all know, the corporation as a person. OK? Now, everybody knows, every lawyer knows, that the corporation is not a person in the way that we normally think of a person.
But they also know, they can understand the idea, that a corporation could be treated as a person in terms of having property rights, having contract obligations, maybe even having free speech rights, and so on and so forth, right? And so they can hold both of those positions at once. Think of the corporation as a person and, of course, not like a person at the same time.
Oh, I should have mentioned these guys down here, does anyone know who that is? Any of the lawyers in the room know who this is? This is Lon Fuller, very famous legal scholar from the mid-century, who really was a champion of this notion of the legal fiction. And he got the idea that this was really important from this guy over here, Hans Vaihinger, who was a philosopher who wrote a book called The Philosophy Of "As If" in 1924, in which he said that this idea of thinking as if that we've been talking about is actually the foundation of all knowledge-- mathematics, science, religion, just about everything. But it happens to be very important in law.
OK. Now, I think of these fictions as what I call a placeholder. Basically, it's like a sort of shorthand that you use in the meantime, in the meantime. We don't know what's going to happen. We don't know if the bank that gave the collateral is going to screw up and not be able to meet its obligations or not.
But for the meantime, we'll act as if they have until, of course, it turns out that it's not the case and that assumption that we were working with didn't work, right? So there's this willingness to assert, but also knowing that down the line it may not work out the way you thought. And it's very, I think, similar to the kinds of things Hiro was talking about.
And the other thing that makes this really work is that it's totally routinized. So there is a document. It's a great example of that. It's a preprinted form.
The process of thinking through these issues is totally routinized. When you circle New York or you fill in the blank, you don't have to think, oh gee, what am I saying? Am I really saying that this is like, you know-- no.
You just fill it out. You do it fast, you know. And you do the same thing over and over and over again. And so you really aren't reflecting on those larger questions.
But it's very interesting that the routinization of this works cross-culturally. You know, that lawyers working on these deals in Tokyo can talk very easily with lawyers in Barbados or in Geneva or wherever about these questions. And there's very little problem, because it's so routinized. OK.
All right, so what have we been trying to say to you here with these two examples? Well, we are trying to suggest or draw attention to some moves, if you like-- what we're calling moves-- that legal and financial professionals share some ways of thinking. So here, we talked a lot about discipline.
I would talk about legal practice or habit or ways of thinking through problems that are part of so-called thinking like lawyer. And that we don't have to reflect on very much, but are very, very fundamental to our shared way of engaging one another as professionals. And you have to practice them. And they become sort of part of your being and your way of thinking both professionally and about personal matters, as Hiro was saying with financial traders.
And I think any of the lawyers in the room will say, yeah, I can't stop thinking like a lawyer when I go home at the dinner table or what have you either. It comes up, right? You say, well, there's a process here, what have you.
And so I've sort of kind of tongue and cheek played around with the idea of moves in the martial arts even. Because there's the same kind of sense of having to practice and knowing what it is and sort of getting it almost inscribed in your, you know, way of acting, so that you don't have to reflect on these moves. You just have them right there kind of at your disposal when you need them. And they're really part of what being a real professional and expert is.
HIROKAZU MIYAZAKI: So what we find in these two areas of professional knowledge is that tools are literally the substance of markets and their regulation. So in finance, financial theories and techniques like arbitrage actually have created the markets. And they are the markets themselves.
One sort of easy example is one of the famous formula for computing the price of an options contract, Black-Scholes formula. When this formula was widely shared among traders, prices of the options contract started conforming to the formula. So formula sort of helped establish the market, partly because the formula happen to become the standardized way to compute the price of options.
ANNELISE RILES: And the same can be said about legal technique in terms of market governance. You know, we normally think of market governance as laws or the things that international bodies do or court decisions or what have you. But really, the way in which market transactions are governed and problems are dealt with as they come up is through these kinds of techniques and the moves and the conversations between lawyers on the day to day basis and the documents that move around.
And if you think about it, most of what actual law is trying to do in this field-- whether it's changing the incentives or outlawing certain kinds of transactions or demanding new kinds of transparency where the parties would have to provide new kinds of documentation or whatever it might be-- are really efforts at simply kind of shaping how people within the market, I'd say especially lawyers in the market or people who do legal type work, go about their day to day practice of governing transactions within their little part of the market. So we say this, because I think most people think that stuff like professional technique is just fluff. It's not really the important stuff.
There's a real market out there. There's a real market out there. And then there's the stuff people do, professionals do.
And we actually think that this stuff is the real market. And you can show that really concretely in finance and I think also in law. And so this stuff really does have wide and important consequences.
HIROKAZU MIYAZAKI: OK. So you may be wondering why are we talking about these techniques in a presentation on hope. So I'd like to kind of go back to Barack Obama's campaign. That's where the key to this question lies.
The question of the substance, the substance of his campaign, his hope, was vigorously debated during the campaign, as you may recall. Obama has style, but not substance. That was a kind of standard line of criticism of his campaign.
And so he didn't have experience. And he didn't seem to have too many kind of concrete policy initiatives and objectives. So therefore, people kind of said that his hope was simply a false hope.
Even at the end of the campaign, his unexpected success was attributed to the fact that he turned out to have both style and substance. And so Colin Powell said in his endorsement that Obama has both style and substance, meaning that hope was style. But he turned out to have something else.
What troubled many about Obama's hope perhaps was similar to the fact about the market, that is the technique is substance, may be troubling. So finance is regarded as sort of virtual, kind of removed from the real kind of economy, out of touch with reality. So what was troubling about Obama's hope is kind of related to what we say about finance perhaps.
But it is kind of helpful to look at the theological content about Obama's hope. Even if he may not admit it, Obama's hope is deeply rooted in a certain Christian notion of hope. And we may say Obama's hope is a distilled version of Christian hope and theological answer to the question of what is the substance of hope.
When it comes to hope, the most common philosophical question is, so what's the reason for hope. Because, you know, in reality, one's hope often is disappointed. So what is the empirical foundation of hope?
So the theological kind of fairly widely kind of shared kind of Christian theological answer to that question involves a redefinition of what counts as substance. Often in hope, the substance of hope is said to be belief itself. And not in the sense of belief in a set of doctrines, but belief as a practice that keeps believers going.
So Obama's move in the campaign is abstracted from this Christian move. And hope is not about specific goals or ends, but is about technique, technique for keep going. And it is a practice that is its own outcome.
And that is why, perhaps, Obama's hope worked, to some extent, to create a sense of openness to the future for many and was contagious across various political, ideological, generational, social, and cultural divides. So in this definition of hope, we will say legal and financial techniques are also hopeful in the sense that they actually redefine what counts as substance, what counts as the real. And they are substantive.
They are the substance of the markets. And like hope, legal and financial techniques are practical techniques that enable their users to keep going. And like hope, they become the substance of what is personal as well as the substance of the market.
ANNELISE RILES: So just to conclude, there are a lot of implications of this research. I mean, there's implications for how we should go about regulating the markets, how we might improve market governance. But we thought we would just mention a separate piece, which is the problem that many professionals we've encountered, including many of our informants, now are facing where they are losing hope, if you like, in their own techniques and wondering if they should switch careers or maybe finding that their jobs are eliminated or a whole range of things.
And it seems to us that there's an industry growing up. You know, I heard on NPR just yesterday a story about this industry of, you know, self-help sort of trying to tell people, oh, what you really need is you need to define your goals. And you just don't have any purpose to your life and so on.
And we actually think that all of this may be directing people in the wrong direction. That they actually have a set of abilities and skills that are extremely valuable, a set of disciplines that they've mastered and which actually-- as we've tried to suggest, because they actually are the market, and they actually add up to market governance-- are themselves the things that could be used to achieve some of those wider goals that these people are being told, you know, you really need to have. And so we want to sort of direct people to rather than just focusing on, you know, giving your life purpose, to really kind of still having a kind of faith in what their techniques might contribute and what the value of those is, not to give up on the means by just focusing on the ends.
And more generally, from the sort of policy point of view, we think that there needs to be a lot more talk about these kinds of techniques and these moves that are made on a day to day basis sort of under the radar screen in the markets as sources of market stability, market legitimacy, and social change, frankly. And we think that that is the kind of thing that Obama was really getting at, that it's probably been misunderstood a little bit in the way the conversation has happened in the popular debate. And that it certainly is a kind of surprising connection, if you like, between current politics and finance, that there is a possibility here that people haven't really explored for bringing more civility and more growth to our markets.
So we'll just mention in closing that we are holding a large global forum on this subject in March. And there's going to be a little bit of seating at the event itself in New York if anyone would like to attend. There's also going to be online streaming and people participating from all around the world.
And if you would like more information about that, you can email me actually, ar254. And I'd be happy to hook you up. So, thanks very much. We have plenty of time for question.
AUDIENCE: [INAUDIBLE] please define in simple language a derivative? It's the same question Michael Moore asks in his film [INAUDIBLE].
HIROKAZU MIYAZAKI: Well, it is a class of asset whose value derives from sort of the assets that are traded in an exchange, other exchange, or-- yeah, I mean an exchange. So it's a kind of reference, the relationship between the price of a derivative and price of the asset traded in a cash market in kind of a derivative kind of relationship. That's why we call those assets derivatives.
AUDIENCE: But what is the asset?
HIROKAZU MIYAZAKI: An asset could be a lot of things, like stocks, you know, securities, whole range of securitized commodities, like, you know, [INAUDIBLE] or what have you. So any of those things as long as they are securitized into tradable things could be turned into underlying assets for derivatives contracts.
ANNELISE RILES: So I mean, sometimes you might think of the simplest version as just a promise, a contract to swap something in the future. So I might say to you a year from now, I'll give you $1 million US, and you give me the equivalent at whatever the exchange rate is then in yen. And, of course, it's derived from, the underlying asset is, cash, right, different kinds of cash.
But what we're betting on here, of course, is how that yen dollar ratio is going to go in the future. But you're right, it does get pretty sort of ephemeral after that. I mean, you could have weather derivatives. You could have all kinds of derivatives and things. Yeah.
AUDIENCE: [INAUDIBLE] derivative on almost anything [INAUDIBLE]. It's a [INAUDIBLE] market.
HIROKAZU MIYAZAKI: Yeah.
AUDIENCE: You talked about the arbitrage in Japan, people arbitrage and it's a part of their life. And to me, that only screams out one [INAUDIBLE] that's always in the media. It sounds sexist, but it's the day-trading Japanese housewife, which apparently is is there empirical evidence that supports the systematic effect of this group which has significant effect on the currency models?
And so it's just in Japan it seems. Are there other countries that have that? Because there's always professional arbitrators, but not this huge bulk when we read that takes place in Japan.
HIROKAZU MIYAZAKI: I mean, I don't have sort of really solid evidence. But it is widely reported that Japanese housewives, I guess-- I mean, [INAUDIBLE].
AUDIENCE: That's [INAUDIBLE].
HIROKAZU MIYAZAKI: Ordinary people are trading in a foreign currency market. And also, if you read Japanese papers, you see, you know, all sorts of products and also invitations to participate in foreign currency markets and futures and foreign currency. You're right.
And it's very, I guess, different from some a situation perhaps. But I don't know to what extent this money is really shaping the market. But that is true that it is widely sort of [INAUDIBLE] advertised. And I know that lots of people invested in a random sort of currency markets, including my mother.
ANNELISE RILES: Yeah
AUDIENCE: One of the things-- talking to my friends back home in business-- that really killed the hope was the fact that credit became so tight. It was like, you know, the pendulum swung from anybody getting the money and the loan and so on to all the way over here where, you know, normal practices were hampered. And I was wondering why there was such a big swing? How come there wasn't, you know, a quarter swing? Because for me, it was just too much all of a sudden.
ANNELISE RILES: Yeah. That's a really good point. I think underlying your question is didn't the market sort of get it wrong by swinging that far, and then therefore cause further problems for themselves? And I'm sure that's really true.
And it actually is an opportunity for me to say something I forgot to say, which is really important, which is that although we think all of these techniques are really very, very significant and under-appreciated, under-analyzed as people talk about market solutions, they can also cause problems, huge problems, right? And there are good techniques and bad techniques. There are people who are good at using them and people who use them badly.
The traders that Hiro works with talk about people losing their discipline and sort of overreaching. And so this would be an example, right? Sort of everyone goes in a certain direction. And because you don't have your movies, your karate moves down, you don't know.
And you sort of just go with the herd and go to far, right? And so they would say there were these problems, but there are solutions to be found from within also to these problems. But I mean, I think empirically, it seems to me that you're probably right about what happened in the market, that it was a sort of a overreach of one kind or another.
AUDIENCE: I just figured they all went to the same country club and--
ANNELISE RILES: Yeah.
AUDIENCE: --decided to put the breaks on.
ANNELISE RILES: Any questions, no? No? OK. Well--
AUDIENCE: There's one question right here.
ANNELISE RILES: Oh, yeah. Please.
AUDIENCE: Are you using hope in any of the same sense that we talk about consumer confidence that seems to be such a component in the stock market, which as I get older, I think rides more on consumer confidence even then economic debt?
ANNELISE RILES: Absolutely.
AUDIENCE: Or is it a different concept?
ANNELISE RILES: No, no. I mean, I think that's absolutely right. All the stimulus packages in the world, right, are only aimed at producing a certain confidence, right? Otherwise, it's just money down the drain, right? And so these things are absolutely related.
The problem is that when people talk about consumer confidence in the press or whatever, I can't figure out what they're talking about. I mean, it's this kind of very vague kind of concept, you know? Where does it actually come from? Where do people get their confidence, right?
And we think that it has, you know, a set of almost structural dimensions to it that aren't well understood. It's not as simple a thing as people think it is, right? And so what would be useful would be to sort of pick that apart and be able to show, you know, how confidence is produced. And that's what we're trying to do. Yeah.
AUDIENCE: [INAUDIBLE] pendulum swinging isn't it, in so many things, you know? It goes too far one way, and then there's a correction. Right, right.
ANNELISE RILES: But this is where these guys' ambivalence is so interesting, right?
ANNELISE RILES: Because it's a correction against that, right? As long as they believe in it, it's about maintaining that balance--
ANNELISE RILES: Right. Yeah, go ahead.
AUDIENCE: Sorry. Have you seen any anecdotal evidence yet after this meltdown that the ISDA agreements, as they're structured, is being-- you know, you guys want those schedules that are that big on the side as well. They're [INAUDIBLE] the other stuff.
ANNELISE RILES: Right.
AUDIENCE: Have they worked so far? I mean, everything's being sorted out still with Lehman--
ANNELISE RILES: Right
AUDIENCE: --and some of those things. You see some dramatic changes going forward and structure of those, because that's what happened.
ANNELISE RILES: Interesting.
AUDIENCE: Have you seen anything yet to--
ANNELISE RILES: Yeah. Yeah. Yeah. It's very interesting. I mean, so you see a lot of confusion. Sorry if this is a little too much detail for people who aren't interested in ISDA. But you see a lot of confusion on valuation issues, but interestingly, very little confusion on the legal issues, right?
So it's very interesting to me as a lawyer that nobody at AIG thought to just actually fight on the legal front and say this thing isn't enforceable or we don't have to play at all. They only played on the valuation issues. How much do we actually owe on these margin calls, right?
Now, so this sort of goes to the difference between, I guess, you know, the loss of hope in finance and the fact that the law keeps on trucking. Why did people actually keep their confidence in law when they lost it in finance? And I mean, we're really interested in that.
What is it about law that is actually quite stable even in times of financial crisis? So I think the legal dimensions of something like ISDA-- you know, I want to say right at the front, you know, I mean, you know, I'm not against government regulation of markets. You know, I don't think it's always bad. Although, I do think that some of the proposals out there right now are probably not going to work.
But I think we really do, whether you're on the left or the right, progressive, conservative, you need to actually pay attention to some of these techniques that the market participants themselves have invented for legally constraining risk. Because these techniques are the sort of unsung heroes of the story. That's the one thing that has actually held up when everything else has been crumbling.
And ISDA doesn't help itself by screaming so much, you know, being against any reform proposal. Because they end up painting themselves as the bad guys in the story, when they might be bad on some fronts. But some things that they've done actually have some value I think. Yeah.
AUDIENCE: But would you consider naked short a legal technique?
ANNELISE RILES: Well, say more. I mean, I wouldn't call that a legal technique, no.
AUDIENCE: [INAUDIBLE] regulatory?
ANNELISE RILES: I'd say, yeah. I'd say it's--
ANNELISE RILES: Yeah, yeah.
AUDIENCE: You speak of techniques.
ANNELISE RILES: Yes.
AUDIENCE: You're not speaking of [INAUDIBLE] market techniques.
ANNELISE RILES: Right, right, right. Interesting. Why, because you--
AUDIENCE: No, I was just trying to get a better feel for [INAUDIBLE]--
ANNELISE RILES: Feel for what we're talking about.
AUDIENCE: --[INAUDIBLE] techniques.
ANNELISE RILES: OK. Well, I'll send you my manuscript. Yeah, last question.
AUDIENCE: What impresses me is that so much risk and brief evaluations and [INAUDIBLE] that, in Japan, the pachinko parlors are full 24 hours a day practically. And people have a sense of this based on very early learning to an almost extreme extent. In the United States, we've got areas like Las Vegas, for example, where the housing bubble grew more than any other area, people used to deal with risk and maybe not experienced enough in it.
But, you know, the community supports the notion of taking great risks. Goldman Sachs with its macho dollar poker orientation, you know, is a prime example as well. You didn't see it coming, took advantage of it. It was really dollar poker. It was pachinko.
And it was housing speculation in Las Vegas. So I think the problem I have in thinking about [INAUDIBLE] context is that they don't extend over intergeographical or social, or cultural minds at the time. They're isolated and each of those kind of definitions has its own set of rules and regulations and thought patterns which lead to assumptions of risk and evaluation of a possible gain, and therefore arbitrage.
ANNELISE RILES: Yeah. I think that's right. But I guess I would say that that's where I think attention to professionals is really interesting, right? Because I would be willing to bet you that if you take a Cornell Law graduate from Japan and a Cornell Law graduate from New York, they're not as different as you think on how they think about legal questions.
They may be very different about how they do pachinko or karaoke or all kinds of other things. But they think in similar ways about the law, because they've been trained. They have a certain kind of professional mentality and confidence and a set of moves and tools that they've mastered, right?
And so when we're talking about, as you say, this huge problem of cultural difference, of the fact that the global world is divided, there are these ways that we connect, right? It might be thin, but there's a connection there, right? And those are things that I think you know, how can we possibly get the EU and the US together on regulatory structures, well, at least we could start by talking about how can we build off what people in the market are already doing, which is not so different in London and New York maybe. Yeah. So we will stop here. Thanks very much.
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"While we breathe, we will hope." When President Barack Obama took office earlier this year, many were suggesting that the new president would put words like this behind him as he turned to the hard-nosed issues of policy making. "You campaign in poetry and you govern in prose," they say. But research suggests that such comments fundamentally underestimate the nature and the power of hope as an instrument of day-to-day regulation and policy making.
In the aftermath of financial crisis, a global search is on for new regulatory paradigms, both public and private. What kinds of social and political institutions give markets legitimacy and encourage market participants, professionals, and regulators to be hopeful--proactive, risk-taking, and embracing of change?
Part of the answer is that lawyers and financial experts already have at their disposal the tools and methods they need to create a healthy global market, if only they could recognize them and more systematically replicate them in public and private regulatory practice.
Hirokazu Miyazaki, Associate Professor Anthropology, Department of Anthropology, Cornell University Annelise Riles, Jack G. Clarke '52 Professor of Far East Legal Studies, Cornell Law School; Director, Clarke Program in East Asian Law and Culture; and Professor of Anthropology, Cornell University
This event was part of the Trustee Council Weekend 2009 activities.