Hamish McRae: An old idea that's a pointer to the new world

Are saver bonds really such a great idea? That depends on the detail of how they will work, for this is the sort of financial device last used in the Second World War.

Britons were asked to save for, say, a propeller for a Spitfire. The problem was not that the government needed extra money to pay for it, for it could print it or borrow it. The problem was the lack of physical capacity for producing another propeller.

But the idea made sense because it mopped up spare cash, involved ordinary people in the war effort, and helped to make workers in the factories feel they were working for real people, not a distant government. Right now, there is no shortage of investment funds as such. There is a flood of money coming into the country and the Government can borrow for 10 years at little more than 1.5 per cent, the lowest in the history of the nation. But the Government has to cut its borrowing to maintain confidence, and one way of doing so is to cut investment. Net public investment has been slashed this year.

So one way of raising funds without adding to the national debt is to bypass the Government and get people to lend directly for investment projects. The money will cost more because there is no government guarantee: the bonds will presumably be secured against the flow of funds the investment produces. But maybe it will be spent more carefully because whoever is running the project has to answer to vocal small investors rather than an amorphous government.

There is a further twist. This does not only bypass government; it also bypasses the banks. Arguably this will reduce the amount the banks can lend because money taken out of a bank account is money that bank cannot package into a loan. But the banks have so many bad debts that they are struggling to make new ones anyway.

So saver bonds are a pointer to the new world: a world where governments are desperately trying to cut their national debt and where banks are being forced to shrink because they have too many bad debts and find it tough to raise new capital. There are plenty of savings around but two of the channels for getting savings into investment are blocked. Instead, there will be a hunt to discover new ways of tapping savings and feeding them into investment. This is one shot at doing it.