Well there we go again Royal Bank of Scotland announces a £5.2 billion loss but sets aside £600 million for bonuses for its bankers link NUTS NUTS NUTS! When Stephen Hester took over the bank in November 2008 the share price was 500 pence today it is 330 pence and he is doing a "good job" please give me a break !! If you look at RBS share price it has collapsed from over £60 to £3.30 ! and they deserve bonuses????? No they do not, that's why the government should have clamped down on the bonus payments when it took an 83% stake in the company. Capitalism is not working as this is monumental rewards for monumental failure. Today we also got news that the EU parliament is clamping down on bankers bonuses -  a bit too late in my view but better late than never but in my mind there should be no bonuses until their share price is back to where it was pre-crisis link . Below is the share price of RBS yes down over 90% from 2003 10 years later and shareholders see just 10% of their money back that's crap performance !

Yep Helicopter Ben is just happily printing $85 billion every month...so Congress does not have to raise the taxes or cut the government expenditure. Hence the stockmarket rallies and everyone in the financial markets feels happy despite negative GDP of -0.1% and unemployment of 7.8% and of course massive fiscal deficits of 7% of GDP. Meanwhile 10 year bond yield is marginally over 2% not enough to cover you for inflation despite spiralling fiscal deficits and national debt to GDP ratios. Well something is going to prick the bond bubble at some point (i) the Bond Vigilantes decide enough is enough and start realising that the new Masters of the Universe that is the Central Bankers are like emperors with no clothes (ii) inflation starts to pick up and the Central Banks have to get it under control and so are forced to raise interest rates and everyone realises they have too many bonds in their portfolios or (iii) Some minor event that does not seem that significant at the time comes along and one or two weeks later becomes seen as the butterfly that flapped its wings causing a tsunami in the bond market. My bet would be on (iii) ! How much could US bond yields rise to? I know this sounds outlandish but 7% would not be unreasonable within say 2 years or less, that means bond holders with 10 and 20 year bonds could suffer a wipe out ! I know a preposterous prediction but there you go. Nice link to Yahoo article with Federal Reserve Governor Jeremy Stein making the point about banks vulnerability to a rise in bond yields link.
 

Nice article by the Bond King Bill Gross link on how the expansion of credit in the economy is not having the desired effect on increasing investment in the economy with declining rates of investment in both Japan and the United States as a percentage of GDP. Of course this does not yet apply to China where both credit and investment have been rapidly expanding as a percentage of GDP.  As Bill Gross notes:

Each additional dollar of credit seems to create less and less heat. In
the 1980s, it took four dollars of new credit to generate $1 of real GDP. Over
the last decade, it has taken $10, and since 2006, $20 to produce the same
result.

More and more credit is now created just so existing debtors can repay their debt rather than to promote real investment and real GDP growth. Governments have just borrowed more and more since 2007 as they have come to the rescue but all this does is raise the national debt and cause bigger problems down the road. I think we need to get back to basics stop relying on debt (increasing national debts) and money creation (think Quantitative Easing) and concentrate on improving the real economy. This means a simplified and sensible tax and benefits system that creates incentives to work and invest, less employment of bureaucrats that spend too much time box ticking and not creating real wealth. There also needs to be better investment of tax payers money in education so that kids don't end up unemployed or committing crimes which is very costly. Finally, we need to fix the financial system so that participants are actually rewarded for making productive investments in the real economy and not rewarded (as is currently the case) for creating new complex financial products that only seem to transfer money to fund mangers and top bankers pay packets for making  speculative investments that blow up once the bonuses have been paid. SIMPLES.

I have always been a bit surpised at how the rating agencies like Standard and Poor's, Moodys and Fitch have got away relatively unscathed from the credit crunch. They were making a fortune rating the Mortgage Backed Securities and Collateralized Debt Obligations that were at the heart of the crisis. I have often used the 4 Ms to characterise the Credit Crunch Crisis - securites were Misrated, Mispriced, Misunderstood and  Missold. In particular, the question arises as to whether the ratings agencies that were stamping AAA, AA, A and BBB on what were ultimately shown to be much riskier BB, CCC and CC or worse securities made genuine errors, were incompetent or just put the rating the issuers wanted to get the fees rolling in.   Certainly the crucial assumption that was in their models that house prices would continue to rise was foolish. In my book I quote Kai Gilkes who worked for ten years at the ratings agencies:

 Everyone was pinning their hopes on house prices continuing to rise . . . When they stopped rising, pretty much everyone was caught on the wrong side, because the sensitivity to house prices was huge. And there was just no getting around it. Why didn’t rating agencies build in some cushion for this sensitivity to a houseprice-depreciation scenario? Because if they had, they would have never rated a single mortgage-backed CDO.


Between september 2004 and october 2007 Standard and Poor's applied credit ratings to some $2.8 Trillion of mortgage backed securities and $1.2 Trillion of CDOs. It may be they deliberately put generous ratings on the securities just to get the business and this is a possibility. Certainly the Department of Justice now seems to be keen to impose fines (as much as $5 billion !) see Bloomberg link on them and both Standard and Poor's and Moody's shares fell close to 14% and 11% respectively yesterday as news about a failure to settle with the DoJ broke see Bloomberg Story link. The following Bloomberg video is also worth a watch!