The credit crunch is fundamentally changing the relationships between governments and the market economy across the developed world - and nowhere more than in the UK. Just in the past three months, at least £50 billion of taxpayers' money has been committed to recapitalise the banking system, a further £200 billion has been made available to the Bank of England's Special Liquidity Scheme and a credit guarantee scheme has been set up.

Two obvious questions follow. How much farther is this government intervention likely to go? And what broad principles should shape these new relationships?

The answer to question one will depend on the depth and length of the recession. But it is already clear that in the coming months a lot more public funding is going to be required to limit the damage being caused across the economy by the continuing problems of the banking system.

The Bank of England's Credit Conditions Survey, published on Friday, painted a bleak picture of deteriorating credit availability and rising funding costs. It's not just the banking industry that needs access to credit support. So, increasingly, do large numbers of its customers.

For example, the UK's automotive sector is among the most efficient in the world; it certainly does not require a Detroit-style bailout. But it is heavily dependent on credit to finance completed vehicles and customer purchases. In the near future, it will need access to credit or loan guarantees running into billions. Otherwise, this vital part of the economy will suffer lasting damage.

The construction industry is also taking a severe hit. In his report for the Government on mortgage finance, Sir James Crosby warned that net new mortgage lending this year could well fall below zero, with only a modest recovery likely in 2010. He argued the case for about £100billion of government guarantees to support mortgage finance markets over the next two years.

Another urgent claim for support from the public balance sheet arises from the growing difficulties now being experienced by many companies - especially small and medium-sized enterprises - in securing the trade credit insurance cover they need to go about their business. There is a strong case for the public sector to stand in as insurer of last resort, offering cover at commercial rates and subject to the normal prudential risks.

So how should the Government go about building these new relationships with industry? It needs to act with a sense of urgency and to follow eight broad principles.

First, it must concentrate on the root cause of the problem, which is the shortage of credit flowing across the private sector. Although the banks have been recapitalised, they have a serious funding problem in the shape of a mismatch between their outstanding loans and their customer deposits. To encourage them to keep on lending, the Government should give a public guarantee that it would, if necessary, inject further capital into the banking system.

But that will not be enough to solve the banks' funding problem. So, second, the Government should aim to get ahead of the curve by putting its own balance sheet behind new funding for the banking sector on a large scale. That way, lenders would be able to advance money to the banks in the knowledge that their money was guaranteed by the Government, and the banks could lend it on to the borrowers that most deserved support. This approach would be a lot better than reacting in an ad hoc fashion to the requests of particular businesses. There's no time to waste here. With every week that passes, credit shortages are an increasing threat to the viability of important parts of the economy.

Third, the new relationships with industry should be temporary, transparent, and kept separate from the machinery of politics. They need a proper institutional base in order to ensure there is no return to the beer and sandwiches corporatism of the 1970s. The Government has made a good start by setting up UK Financial Investments, which will manage on a commercial and arm's-length basis the public's new shareholdings in British banks.

Fourth, these financial arrangements should be established in a way that makes them easy to unwind when the recovery comes. And unintended consequences should be avoided. For example, it seems probable that the terms of the Government's investment in those banks now in part-state ownership discourage them from lending. If so, those terms must be changed.

Fifth, the Government has to make sure that these new relationships do not distort essential features of a competitive economy. Among other things, that means retaining its commitment to flexible labour markets, to free and fair trade, and to robust competition policies. All three could be placed at risk by clumsy government intervention.

Sixth, it will be very important not to undermine the independence of the Bank of England as a credible monetary authority. The larger the role the Bank plays in channelling credit to the private sector, the greater the risk that it could be turned into just another arm of the Treasury. Its balance sheet has grown from very roughly £50 billion to something like £200 billion over the past year. If it is going to get a lot bigger for reasons which are not to do with monetary policy, it is going to require clear and specific government guarantees to cover its increased risks. Otherwise it could be subject to undue political influence.

Seventh, the fate of our economy over the short term will rest to a large degree on what happens elsewhere, especially in continental Europe and in the US under its new leadership. So the Government has to remain active in global policymaking.

Eighth, our political leaders need to be bold and to do everything they can to restore confidence in the system. The Prime Minister took decisive action in October: it's time for more of the same. Events in the coming year are going to have an important impact on the long-term shape of our economy. Properly managed, 2009 could turn out to be a turning point in the right direction.

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