Hamish McRae: Whatever the nostalgic glow of the '50s golden age, we are better off out of it

So we are back to the early 1950s. Well, not exactly of course, because we are not recovering from the global catastrophe of the Second World War but from the consequences of global boom. That 2 per cent Bank rate in 1951 came after a massive destruction of wealth; this one comes after massive creation of wealth, even though this has become diminished in recent months.

Yet there are similarities. Interest rates are low now, as then, but it is hard to borrow the money unless you have an excellent credit rating. And deposit rates are below the rate of inflation, so now as then, society is stealing from its savers. One of the oddities of politics is that borrowers seem to have a much louder voice than savers, even though it takes four or five savers to put up the deposits to support one mortgage borrower.

As this gradually becomes clearer, I expect that the needs of savers will gain more traction. In the short-term, the cuts in interest rates are justified and I would expect more to come in the new year. But cutting official rates is not of itself a quick fix. It should eventually pull down rates in the money markets but this is a necessary but insufficient step. The authorities will have to do more, maybe much more, to keep supplying the market with liquidity.

Bank assets have grown substantially relative to GDP over the past five years. But many of these are not liquid. For banks, what counts is the cost of raising funds and this has remained high.

The banks cannot lend money they don't have, whatever the Prime Minister tells them. Though the government has or will have a large shareholding in the banks, a controlling one in the case of Royal Bank of Scotland, it does not directly supply them with the deposits against which they can make their loans.

So what should borrowers and savers do? The answer is to behave a bit more like they did in the 1950s.

In the case of borrowers we will be in a world where credit is limited by administrative decision rather than price. That decision will be based on a number of criteria, most obviously the ability to service the debt but also the quality of the security against the debt. Banks moved from the 1960s onwards from a pattern where security was the key variable to one where cash flow was more important. Now we will move back a bit towards the old-fashioned model. From the point of view of a homeowner, this will mean, as it already in effect has, that high-loan-to-value mortgages will disappear. Banks will want to know their customers, favouring potential borrowers who had a record of saving with them first. This "know your customer" practice will be given a push by government pressure not to foreclose on mortgages if at all possible. Banks hate foreclosing because it is expensive and traumatic but if the government makes it even harder, the lenders will be even more cautious when making new loans. So people in insecure jobs will find it harder to borrow than those in relatively secure ones in the public sector.

For businesses, the pressure on banks to maintain lending to existing customers will make it harder for new ones to raise funds. In effect, the banks have a given pot of money that they can lend. That means new businesses will have to rely on non-bank sources of capital, just as they had to in the 1950s. These non-bank sources will include family and friends but also other business associates. My point here is that if formal intermediation by banks decreases, as it will, informal structures will take its place. Businesses and individuals that are cash-rich will have business opportunities that they would have had three years ago. This will, however, take time and the number of new business start-ups will, meanwhile, decrease.

What about the position of savers? Putting money on deposit with a bank will be a bad deal, so what will people do? Many will simply accept it. That is what happened in the 1950s and what is happening in Japan now. But I expect the more sophisticated investors to look more widely for ways of getting a higher income, accepting some loss of security for that. The equity culture has been savaged by the events of the past couple of months and that will take a long time to repair.

The hunt for yield, however, will become more widespread. Fears about the future have encouraged people to invest in government securities with the result that yields there have fallen. As confidence gradually seeps back, I would expect a switch out of government securities and into corporate ones to gather pace. Lots of large companies around the world will need to refinance debt and will have to offer high coupons to do so. So another return to the 1950s will be that ordinary savers with banks or National Savings will not get a very good deal while more sophisticated savers will have other options. This is not equitable but that is the way it is likely to be.

That leads into a bigger discussion that is worth touching on here. There is a widespread feeling that finance has to be fair. The Prime Minister has made this point over the narrow issue of banks passing on the interest rate cuts to borrowers but there is surely a wider concern, a rejection of the go-go values of the recent boom, and even a nostalgia for the more stable society of the 1950s, now referred to as a "golden age".

Well it didn't feel a golden age at the time (Yes, I do remember). As far as finance was concerned, credit was limited to those who already had money or at very high rates on hire purchase, where the buyer of the product, say a car, did not actually own the thing until the final instalment was paid. It was a society where children had to be helped by their parents to get a deposit for a house and where people got jobs because their families knew someone. If you had family money you were fine, but if you did not, high taxation made it impossible to accumulate any wealth. In other words, it was a stable society but it wasn't really a fair one at all. Inequalities of income were lower than now but inequalities of wealth were far larger.

The coming year will be difficult for savers and borrowers alike and the Government can do little more about it. The Bank of England fired most of its remaining ammunition last week. Sure, rates can go down to 1 per cent or 0.5 per cent but if the lowest rate of interest since 1951 does not revive the economy what makes anyone think that a still lower one would do so? The fiscal deficit in the next financial year is projected by the Treasury to be the highest as a percentage of GDP since 1947. So no ammunition left there – and actually borrowing that amount may well have a perverse effect and make matters worse, not better. But I think we should resist the idea that somehow things were better in the 1950s. And we should remember that economies are self-healing and that this downturn will in all probability not be as bad as some of the other post-war ones.

It's up to British consumers to persuade our companies to be creative

Feeling innovative in your present-buying this Christmas? Or is this the moment to play safe and get something useful?

If you do feel like adventure, be assured that you are doing something useful for the economy. I know we are all being told we must shop for Britain, but quality matters as much as quantity. Or at least it does according to a new book, The Venturesome Economy: How Innovation Sustains Prosperity in a More Connected World, by Amar Bhidé. The author is a professor of business at Columbia University in New York and has sought to explain why it is that so much innovation comes out of the US. His core message is that you need innovative consumers. This, rather than the cutting-edge stuff in the university labs or the research departments of multinationals, is what gives America its edge.

I find this convincing because you can see other examples of it, both positive and negative, elsewhere in the world. Why was the World Wide Web commercialised by the US, even though it was invented by a Briton working in Switzerland? Why has Scandinavia been so successful at high technology? Why has Japan not taken the lead in internet applications the way it dominated consumer electronics in the 1980s? How did we in Britain manage to create the world's largest mobile phone company? And why is Apple so creative?

The answer is that the US, Scandinavia and, to some extent, the UK have creative consumers; by contrast, Japan used to have them but no longer does.

Professor Bhidé argues that America's consumers will enable it to retain this lead, which makes sense, but I think you could also argue that in some aspects of US consumption, its buyers are very backward-looking. Why have American car companies got away with such unattractive products, leading them into such trouble now? Because car buyers there insist on driving around in light trucks.

So we here have a clear duty in the festive season. It is to buy home-produced goods, provided they are cutting-edge stuff.