So George Osborne reveals his big idea for reducing debt: Privatising the banks and letting taxpayers buy shares at a subsidised price.

The idea does have some merits, but it also has its faults.

Meanwhile, media reports suggest Peter Mandelson is working on a scheme that really does have the germ of a good idea behind it.

So the shadow chancellor wants to see a Thatcherite privatisation programme for the banks. Some of the media slated the idea because they said the government would be encouraging its citizens to take risk. Shares have performed badly for the last few years, therefore it is irresponsible to encourage the electorate to buy shares.

But in this respect the media is a victim of the recency bias. Unlike the media, the government must never allow itself to be unduly influenced by recent experience over the longer-term story. Contrary to popular opinion, the problem for the UK was not that investing became too risky, rather, investors didn’t take enough risk and allowed themselves to be seduced by property and derivatives which were supposed to be less risky. The truth is, in the long run there is growth only in rising productivity, and you only get rising productivity if you invest in risky ventures. If instead you poor your money into ventures that don’t create wealth, in the long run you are pouring your money down the drain. Such an investment strategy isn’t just risky, it is far worse than that. It is guaranteed to fail.

Osborne’s idea of privatising the banks makes some sense. Assuming globalisation goes back on track, state-owned banks will be worth a huge amount of money in a few years’ time, and when they are privatised the exchequer could make a nice windfall. The proceeds could be used to radically cut government debt. The biggest risk to this is that the government tries to run the banks so that their policies fit the national mood. Banks have to be run to maximise profits, or else the taxpayer will get less money back when they are privatised.

However, Osborne’s idea for a subsidised offer price is silly. You may recall, when British Gas was privatised the marketing programme revolved around the slogan ‘Tell Sid’. At the time, one newspaper ran a cartoon with the caption saying: ‘Tell Sid he already owns British Gas’.

The truth is that when a company is privatised, it switches from being owned by all the taxpayers to being owned by some of them. A subsidised share price offer will simply mean those taxpayers who buy shares are being subsidised by those taxpayers who don’t.

Of course, from a marketing point of view it may make sense to say the shares are being subsidised. It may make sense to offer a BOGOF deal, and for every two shares in the state-owned bank that you buy, you get a third share free. But that is a different matter. That’s not really a subsidy at all, it is just good marketing.

Meanwhile, Mandy is said to be studying the German model of a state bank, called KfW, that backs small businesses.

The idea has been discussed before, and this column has waxed pretty lyrical about it.

You may know that 3i was originally called the Industrial and Commercial Finance Corporation, and was formed in 1945 by the Bank of England and a number of commercial banks.

The shareholders sold off their shares in 1987, when the company became known as 3i.

In theory, there should be no reason why we need a state bank that provides funds for business. If a new business idea has merit, then the private sector should provide funding.

But the credit crunch should have taught us that that principle does not always work. Money was ploughed into apparently low-risk ventures such as property and hedge funds, and investing in small businesses was deemed too risky.

In other words, the arguments in favour of promoting share ownership of the banks, and state subsidised banks for supporting small businesses, are pretty much the same.

© Investment & Business News 2013