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Are Bonds Opaque and Confusing Because They Have to Be?

Mother Jones

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A few days ago Brad DeLong tagged a piece by David Warsh that promises to be a preface of sorts to a 14-part series about some new research into the nature of finance and the origins of the Great Recession. It actually looks pretty interesting, but I confess I’m a little unclear about one of its central points.

As we all know, one of the problems the Great Recession uncovered was the brave new world of rocket science derivatives, which were so complex that no one truly knew what they represented. Warsh suggests that this is no accident:

Stock markets existed to elicit information for the purpose of efficiently allocating risk. Money markets thrived on suppressing information in order to preserve the usefulness of bank money used in transactions and as a store of value. Price discovery was the universal rule in one realm; an attitude of “no questions asked” in the other.

….This new view of the role of opacity in banking and debt is truly something new under the sun. One of the oldest forms of derision in finance involves dismissing as clueless those who don’t know the difference between a stock and a bond. Stocks are equity, a share of ownership. Their value fluctuates and may drop to zero, while bonds or bank deposits are a form of debt, an IOU, a promise to repay a fixed amount.

That economists themselves had, until now, missed the more fundamental difference — stocks are designed to be transparent, bonds seek to be opaque — is humbling, or at least it should be. But the awareness of that difference is also downright exciting to those who do economics for a living, especially the young. Sufficiently surprising is this reversal of the dogma of price discovery that those who have been trained by graduate schools in economics and finance sometimes experience the shift in Copernican terms: a familiar world turned upside down.

I can’t do justice to the whole idea in an excerpt, but this gives you a taste of Warsh’s thesis. But it confuses me. Certainly he’s right that mortgage-backed securities of the aughts were astonishingly opaque, but why does that lead us to believe that bonds, in general, “seek to be opaque”? For most of the 20th century and before, bonds were considerably simpler than the derivatives of the 21st century. The value of a corporate bond depended on the likelihood of bond payments being made, which in turn depended on the profitability and overall growth prospects of the firm. The value of a company’s stock also depended on the profitability and overall growth prospects of the firm. If you knew one, you knew the other. Bonds, in general, were no more opaque than stocks. And none of this had any relation to bank money, did it?

Maybe this will all be explained later. If Warsh is arguing that the transparency of the debt and equity markets have changed over the past decade or so, that’s one thing. But if he’s arguing that they’ve always been fundamentally different, then I have some questions. I hope he answers them over the next 14 weeks.

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Are Bonds Opaque and Confusing Because They Have to Be?

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Film Review: "The Hand That Feeds"

Mother Jones

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The Hand That Feeds

JUBILEE FILMS

At the beginning of The Hand That Feeds, Mahoma López, an undocumented Mexican immigrant, counts out the $290 he’s just received for a 60-hour workweek in a deli on New York City’s ritzy Upper East Side. The film feels like a familiar tale of exploitation and wage theft, until López and his Hot & Crusty coworkers stand up and fight back. In this behind-the-scenes look at the ensuing labor dispute, directors Rachel Lears and Robin Blotnick lead us through the struggles and eventual triumph of López & Co. as they enlist the help of activists and, notably, a group of Occupy Wall Street-influenced twentysomethings. Despite the film’s narrow focus—which leaves out some much-needed context about the treatment of immigrants in the restaurant biz—it’s an inspiring tale.

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Film Review: "The Hand That Feeds"

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What the Hell Is Happening in Iraq Right Now?

Mother Jones

Iraq is rapidly slipping out of government control as an army of Al Qaeda-inspired militants storms toward Baghdad. Here’s what we know about who these fighters are and what drives them.

Who are these militants?

Some of the fighters are part of an Al Qaeda offshoot known as The Islamic State of Iraq and Syria (ISIS) or the Islamic State in Iraq and the Levant (ISIL). A Sunni militant group led by an Iraqi named Abu Bakr al-Baghdadi, ISIS grew out of Iraq’s Al Qaeda faction. US troops fought with ISIS and its predecessor until the day they withdrew from Iraq in December 2011.

In the last year, according to the Washington Post, the group became “far more lethal, effective, and powerful” as it focused on controlling parts of war-torn Syria. “ISIS lured into its ranks the bulk of the thousands of foreign volunteers, some from Europe and the United States, who have streamed into Syria to wage jihad, further bolstering its numbers.” ISIS already controls parts of northern Syria along the Euphrates River and much of the arid western region of Iraq, from the Syrian border to Fallujah. As a result of ISIS’s increasing dominance, a rift opened between Al Qaeda and ISIS earlier this year.

ISIS has combined forces with other militants, including local Sunni groups; militias led by members of the Baath party, which ruled the country under Saddam Hussein; and at least one of Hussein’s former top military commanders. It’s not necessarily an ad hoc allegiance: One military leader has said that the planning for this strike began two years ago.

The size of ISIS is unknown. According to the Guardian, the group commands roughly 10,000 men. They are well-trained: “They’re like ghosts,” said one Iraqi officer. “They appear, strike, and disappear in seconds.” Also, there’s this scary paragraph, via the Guardian (emphasis ours):

Iraqi officials told the Guardian that two divisions of Iraqi soldiers — roughly 30,000 men — simply turned and ran in the face of the assault by an insurgent force of just 800 fighters. Isis extremists roamed freely on Wednesday through the streets of Mosul, openly surprised at the ease with which they took Iraq’s second largest city after three days of sporadic fighting.

Why are they doing this?

ISIS is seeking to establish Sunni control over Iraq and the Levant region, which includes Jordan, Syria, Lebanon, and Palestine. In a video posted right after ISIS forces took Tikrit, the birthplace of Saddam Hussein, the group’s spokesman ordered ISIS forces to march on Baghdad, the seat of the country’s Shiite-led government. “We have a score to settle,” he says.

The militant groups assisting ISIS share the same goal, “which is getting rid of this sectarian government, ending this corrupt army and negotiating to form the Sunni Region,” a high-ranking Baathist leader told the New York Times.

Where is this all going down, exactly?

ISIS has seized northern Iraq at breakneck speed. Militia forces first clashed with Iraqi soldiers in Mosul, a city in northern Iraq and the country’s second-largest city, on June 7, and controlled the city by June 10. By June 11, they had pushed south and taken Tikrit and Baiji, which supplies the cities of Kirkuk and Baghdad with electricity.

In Mosul, ISIS freed Al Qaeda fighters from prisons and Iraqi officers set fire to fuel and ammunition depots as they retreated. “Mosul now is like hell. It’s in flames and death is everywhere,” one refugee told Reuters.

The decisive battle will most likely take place in Baghdad. As ISIS converges on the city, hundreds of thousands of civilians are fleeing ahead of them.

In all, ISIS has some control or is fighting to take some two dozen large towns and cities across northern Iraq. Notable exceptions include Erbil and Kirkuk in the semiautonomous, oil-rich Kurdish region that borders Iran and Turkey. While reports indicate that Iraqi government troops have fled the area, Kurds say their pesh merga forces are in firm control of those key cities.

The New York Times has a useful map on where ISIS is gaining control in Iraq and Syria.

What is the Iraqi government doing about it?

The Iraqi army has skirmished with ISIS forces before, sometimes with the support of the country’s Shiite-aligned militia groups. But the Iraqi army has offered very little resistance to ISIS since this conflict kicked off last week. In Mosul, the site of the first major clash, many US-trained Iraqi soldiers abandoned their posts and stripped off their uniforms to blend in with fleeing mobs. An Iraqi military officer described witnessing a “a total collapse of the security forces” in Mosul.

Prime Minister Nouri al-Maliki has requested emergency powers in response to the threat. The Iraqi parliament delayed voting on a request, which reportedly entails the power to impose curfews and censor news media.

What is the US doing?

On Thursday, President Obama said that he and his national security team are weighing all options for helping the Iraqi government respond to ISIS advances. “I don’t rule out anything because we do have a stake in making sure that these jihadists are not getting a permanent foothold in either Iraq or Syria,” Obama said when asked whether he is considering drone strikes. (Maliki’s government reportedly wants the Obama administration to conduct targeted air strikes.) The president has the authority to intervene in Iraq without congressional approval because the original war authorization hasn’t expired. However, White House press secretary Jay Carney said that the administration is “not contemplating sending ground troops” to Iraq.

“It’s a rapidly deteriorating and grave situation in Iraq,” Sen. Bill Nelson (D-Fl.), a senior member of the Senate Armed Services Committee, said.

Is anyone else doing anything?

The UK has ruled out military intervention, but may provide humanitarian aid. Iran, on the other hand, deployed Revolutionary Guard forces to help Iraqi troops, according to the Wall Street Journal.

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What the Hell Is Happening in Iraq Right Now?

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Public Service Announcement

Mother Jones

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I’ll be off for the rest of the year, returning after New Year’s. During the next week I might pop in with an occasional post, or I might not. Who knows? Friday catblogging, however, will appear as usual on Friday.

In the meantime, enjoy what’s left of 2013, and let’s all hope that 2014 is a whole lot better.

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Public Service Announcement

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