The phrase "we are in uncharted waters" barely covers the extent of the collapse of the Government's fiscal and monetary framework. Last week Chancellor Alistair Darling sent two historic signals. One was to the markets that the cherished "golden rules" on the budget deficit and Government debt have been scrapped. The second was to the Bank of England, releasing the Governor Mervyn King from the 2% inflation target.

Thus have the twin pillars that have dominated Government economic policy for the past decade buckled like plastic in this firestorm. Argument rages as to what should now replace them and why it was that a system of rules designed to prevent a collapse into recession and instability has failed so calamitously. That should certainly counsel caution on policymakers rushing forward with a new regime of different rules to manage developments that are effectively out of their control.

For now, the policy priority is to encourage banks to continue to lend to businesses and individuals. But can the Government credibly do this? So far there is little sign that its rescue of the banks, with the stipulation that they maintain their volume of lending to small businesses in particular and also to households, is having the desired effect. And there is growing doubt that cuts in interest rates will now do so, given the delay by the Bank of England in keeping up with the curve.

Over the next few months, businesses across Britain are going to be in acute need of further lending from their banks. The reason is that they have responded so far by making use of their own cash resources, in the hope that the downturn would be mild and short lived. Now, as the Bank of England revealed in its Financial Stability Report last week, corporate deposits with banks are at their lowest since 1980.

At the same time, banks are now accused of veering to the other extreme; this time of excessive caution. Terms of loans to businesses are being reviewed – upwards. Applications for further lending are put on ice or making glacial progress through the approval system, while personal customers now find their overdraft limits being cut and their credit cards subject to random, lengthy and exhaustive "spot checks" when presented for use.

But as economic activity continues its sharp decline, banks are increasingly apprehensive about the ability of companies to service the loans they already have, never mind take on new ones. Weak companies will buckle and go to the wall. Why rush to add to this exposure?

What is needed is a series of swingeing reductions to take interest rates down to 2% by the spring. A full one percentage point cut on Thursday to 3.5% would be a useful first step. This would have the twin effect of truly easing the pressure in wholesale money markets while delivering a psychological boost to help counteract the increasingly fearful and apprehensive mood spreading across households and businesses.

The central bank itself may have to step in directly to provide lending support to corporate borrowers. But an immediate problem would be its scale and manageability.

There is no simple answer to the problems we are now facing, nor any simplistic, formulaic golden rules.

Any system of subsidised support for business lending would be open to abuse, with money going to businesses that had no need of subsidy while other firms felt that they were not getting enough support. The Government should not get involved in the micro-management of banking, but it should do what it can to prevent the general business climate from worsening.

It also needs to take care that its billowing borrowing commitments do not get out of control, if only for the simple reason that it risks exhausting the willingness of lenders – if not their actual means. Who are going to be the buyers of all this Government debt being floated worldwide? Sovereign wealth funds are going to be much more selective given the huge losses suffered on earlier forays into Western financial markets, and Asian resources too for the same reason. As for the International Monetary Fund, there is already a queue and it is looking less orderly by the week.

The Government is now reliant on an upturn in domestic savings to subscribe for the flood of gilt issuance. The price, of course, is not only in the interest rate that will be demanded but also in the reduction of household spending.

As for the Bank of England's remit to target inflation, this needs to be drastically reviewed on two counts. First, some formal recognition needs to be given to the need for financial stability rather than a simple inflation target. Second, the Consumer Prices Index, the actual inflation measure, by failing to include a house price component allowed interest rates to be kept too low for too long as the property market boomed, and kept rates too high when we were clearly heading for a house price crash.

But this was the measure specifically adopted by the Government to make the UK more harmonised with the Eurozone for the purposes of joining the single currency – which we chose wisely in the end not to do. But we were then lumbered with an inflation measure that missed one of the greatest asset bubbles of all time.

More important now than more rules – golden or otherwise – is the calibre of leadership to take us through this crisis. This need is not confined to the political realm but needs to be evident also in the corporate and financial sectors.

We will see what, and who, now emerges in what is by any standards a critical turning point in our economic, financial and political history.