Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
and borrowing dulls the edge of husbandry.
What is a bond? The first two definitions offered by the Merriam-Webster dictionary give us some idea: “something that binds or restrains” (fetter) and “a binding agreement” (covenant). A government bond possesses both characteristics. First, a bond is a covenant by the government to the holders of its debt to pay them back. Second, a bond ties the hands of government to manage its money in ways we will discuss later. At its basest level, however, a bond is nothing more than a loan.
How does a bond differ from a stock? If you own a stock, you have an ownership interest in the seller; if you own a bond, you do not. The private sector can raise money by selling stocks or bonds, but the public sector theoretically is limited to taxes and bonds because it cannot transfer an ownership interest in itself to another person. (This assumes, of course, that you do not believe political contributions are the equivalent of public sector stock transfers in which contributors buy ownership interests in their favorite elected officials – “a rose by any other name” as Shakespeare would say.)
How does a bond differ from a deficit? The West Virginia Constitution provides that the Legislature may not amend a budget bill “so as to create a deficit.” If the West Virginia Legislature approves a $100 million bond, does it not owe $100 million to bondholders and hasn’t it thereby created a budget deficit? Of course, it has. But just as we have been happy to construe public approval of a lottery as public approval for slot machines and table games, our political officials have been happy to ignore this inconvenient truth.
How does a bond differ from a loan? It does not. There is a borrower – the government, a lender – the bondholder, an interest rate – the coupon, a payback period – maturity, and even collateral.
A bonding transaction may be simple, but bonding’s rich cast of characters, as intriguing (double meaning intended) as any who inhabit Shakespeare’s Hamletonian world, are not. Tomorrow we will begin with an essential character in any bonding story: the lovely, fair-haired Ophelia.
Bonding has been much in the news lately. On the one hand, West Virginia School Building Authority executive director Mark Manchin has proposed a “bond anticipation sale” to generate funds for public school building construction and renovations. Otherwise, the School Building Authority will not be able to dole out its usual largesse because none of its current bonds mature before 2014. On the other hand, the West Virginia Parkways Authority is struggling to structure a bond deal to complete the new four-lane U.S. Route 35 to West Virginia’s border with Ohio and in the process establish a toll road.
In 1960 the New York Times published a full-page advertisement titled “Heed Their Rising Voices” that sought to raise funds to defend Dr. Martin Luther King, Jr. against an Alabama perjury indictment. The advertisement, which contained several inaccuracies, was critical of the Montgomery, Alabama, police.
This weekend saw the publication of possibly the most significant leak of U.S. military documents in history. Wikileaks shared hundreds of thousands of pages of documents about the Iraq War – first with major media outlets like the New York Times and then with the rest of us. If reports are to be believed, the documents confirm a lot more deaths than originally reported, raise questions about our use of contractors to fight wars, and show that we were losing the war more badly than reported in 2006.