Spanking bank investors
There's been a bit of fuss about a decision by the government to suspend interest payments on £325m of its liabilities - which to some looks like the state defaulting on its debts.
But don't panic.
This isn't the Treasury announcing that it can't afford to keep up the payments on its great mountain of new borrowing, which grows ever-larger as tax revenues dwindle and social security payments escalate.
This isn't a declaration that the state is bust.
No. What's happened is that Bradford & Bingley, the nationalised mortgage bank, has stopped paying interest on £275m of subordinated notes and £50m of perpetual subordinated bonds.
Which may sound dull and technical, but it matters quite a lot - partly because it's very much a first.
Up to now, the government has made sure that payments were kept up on all such bonds issued by banks that have been nationalised or in which it has a big stake.
For example, Northern Rock is still paying interest on its subordinated debt.
So why is Bradford & Bingley inflicting serious pain on investors in its subordinated bonds when Northern Rock is not?
Well, the reason is that Bradford & Bingley is being wound up whereas Northern Rock is being managed as a going concern.
However, that difference between B&B and the Rock is based on nothing more than the impotence of the Treasury at the time that the Rock was collapsing, in that it did not then have the legal powers to dismantle the Rock in a way that both protected depositors and allowed for an orderly liquidation of assets.
The Treasury acquired those powers in the legislation that nationalised the Rock - and then exploited them in the way it took control of B&B last September.
So the Rock lives on more-or-less as a matter of luck.
That said, it's not altogether clear that some great injustice is being meted out on B&B's bondholders. Arguably what's unfair is that equivalent pain hasn't been inflicted on holders of the subordinated bonds sold by the Rock, and even on holders of HBOS and Royal Bank of Scotland bonds too.
These bonds count as what's called Tier 2 capital - which means that under global banking rules negotiated painstakingly over the past 25 years, they were deemed to be risk capital, or part of the buffer for banks to protect them when they incur serious losses on loans and investments.
As someone who has been a banking journalist at various times since the early 1980s I can speak with weary authority about the many years of intellectual toil invested by an elite financial priesthood of central bankers and regulators in devising complex rules on the capital that banks should hold.
These are known as the Basel Rules. And since the late 1980s, they have been the foundations of how banks operate: they determined how much banks could lend relative to their capital resources.
Few can now doubt that they have been calamitously inadequate foundations, made of paper and feathers rather than stone and concrete. They have been a monumental failure - in that they didn't prevent the worst banking crisis the world has seen since just before the First World War. Worse, they may have contributed to that crisis.
One element of the Basel Rules that turned out to be utterly fatuous was the idea that subordinated debt is any kind of buffer or protection for banks. When the going got tough for banks after the summer of 2007 - and especially in the autumn of 2008 - that subordinated debt, that Tier 2 capital, even some of the supposedly better quality capital classed as Tier 1 - well, it all turned out to be irrelevant, no protection at all.
As banks crashed, all that mattered in respect of their ability to survive was how much "core" equity capital they had. Their viability was assessed by investors, markets, regulators, central bankers and finance ministers in the way that banks' viability has been assessed for almost 200 years, which is whether their traditional share capital and reserves were sufficient to absorb the losses.
In an instant, the many thousands of hours of theological debate that led to the Basel rules were more-or-less consigned to the dustbin of history.
More extraordinary still, banks that were to all intents and purposes bust decided that it was absolutely imperative to keep up the payments on the Tier 2 subordinated debt - and they were backed in this respect by governments and regulators.
In other words, banks did everything they could to bail out professional investors who had bought the subordinated debt. As the going got tough, banks simply abandoned the commonsense principle that providers of risk capital have to take the rough with the smooth.
Which is pretty rum.
If professional investors can't be punished for failing to prevent our banks from taking excessive risks, what chance is there that market discipline can ever succeed in maintaining banking stability?
Of course I can see why holders of B&B's bonds should be crying foul. Naturally they think it's appallingly unfair that they should be punished when providers of Tier 2 capital to the Rock, RBS and HBOS are sitting pretty.
But for the long term health of the global banking system, it might actually have been better if a few more holders of these bonds had been squeezed till their pips squeaked. Perhaps then they would have an incentive to keep a closer eye on the behaviour of those who run our banks, and might even prevent them taking the kind of mad and reckless risks that got us into this dreadful economic mess.