Interest rate spreads should not be analyzed in absolute but in relative terms.

Sir, you know that I hold that regulators with their capital requirements for banks, manipulated the relative risk-adjusted return on bank equity to be much higher for what was officially perceived as absolutely safe, than for what was perceived as risky. That, pushing the banks to hold excessive exposures to some of “The infallible” that later turned out to be fallible, and against holding minuscule capital, was the prime cause for the crisis. That, reducing the incentives for the banks to lend to “The Risky”, those actors who on the margin are the most important for the real economy, is hindering the recovery.

And so of course I am amazed to see one of your star writers, Martin Wolf, writing “A perilous journey to full recovery” January 30, without even touching base on this issue.

But, that said, what I wanted to comment on today is the ease with which so many, like Wolf, use the concept of interest spreads between “yields on sovereign bonds of vulnerable eurozone sovereigns and those on German Bunds” to point in some direction, without adjusting for changes in the base rate. For instance is a 2 percent spread when the base rate is 3 percent, higher than a 1 percent spread when the base rate is 1 percent? As I see it, not really, in the first case there is a 66 percent difference, in the second 100 percent. Interest rate spreads, as most in life, is quite often not something absolute but something relative.