Interest rates are low, but the ratio of rates to the “risky” over the rates to the “infallible” is probably the highest ever.

Sir, John Authers quotes Deutsche Bank’s market historian Jim Read on us “entering the unknown” with respect to the interest rates being “so low, for so long, for so many”, and he writes in UK “the base rates are at the lowest in 318 years, “London property market cannot avoid mean reversion” September 10. 

Absolutely, but those are the rates for those in the center rated absolutely safe, those so much favored by accommodating capital requirements for banks. If he wants to see a quite different story, he should look at the ratio between the interest rate charged to the “risky”, those living in the periphery, like small businesses and entrepreneurs, divided by the interest rate charged to the officially “infallible”, and he might then find that ratio larger than ever. 

If the current mean, which has resulted from these capital requirements is to revert to some historic standard then regulations should also conform to a historic standard. 

Authers also writes “Bank of England’s balance sheet is its biggest, compared with the size of the UK economy, since the records began in 1830”. But, to get a real grip on the true monstrous size of that balance sheet, he should perhaps also include how much QE all those commercial banks, acting almost as quasi-branches of the central bank, have provided to government’s treasury, because that requires little or no capital of them.

The center should transfer to the periphery their almost ill-gotten regulatory interest rate savings

Sir, Wolfgang Münchau in “The ECB must still do its bit to help solve the crisis” August 27, reminds us of that “There is a law against monetary financing of sovereign debt”. Should there not also be a law that prohibits doing so using the backdoor of banks and bank regulations? 

The fact that banks all over Europe could lend to Greece against only 1.6 percent in capital seems to me a very close relative of “monetary financing of sovereign debt”. These regulations, when something goes wrong, as it is almost doomed to go, because of the distortions these produce, create its own set of problems. 

When Münchau, with respect to any official explicit target for interest rate spread writes “The market would test any published target” we might therefore have to add, for precision, “market and regulators”, I explain: 

There are havens perceived as very safe, Germany, and those perceived as not so safe, Spain, and that would, without any regulatory intervention, reflect itself in the interest rates. But, the way current bank regulations are set up, with bank lending to the officially safe havens requiring much less capital than when lending to those “not-safe”, the natural market cleared interest rate differentials based on risk, become so much larger.

Anyone who is really sincere about solving the European problem, or even about not making it worse, must either eliminate the discriminatory effect of these regulations, or make sure that the safe-havens transfer some of their almost ill-gotten interest rate savings, to those less safe havens that have had to pay higher than natural free market rates.