“These leaders of finance”, wrote Henrik Ibsen, “are like beads on a string - when one slips off, all the rest follow.” The contagion of bad debts in the Western financial system has had precisely that effect. Banks are tied together through the wholesale lending market. If one bank fails, then there is an irreducible risk of a domino effect through the system. Banks have become unwilling to lend, other than at punitive rates of interest, for fear of not getting the money back.

This is the fundamental characteristic of the credit crunch. And unlike a normal cyclical downturn, the crisis is having catastrophic effects on the real economy. In particular, it is damaging smaller companies. These businesses depend on access to stable lines of credit. They are, by all anecdotal accounts, suffering. Yesterday Alistair Darling and Lord Mandelson, the Business Secretary, met chief executives of the high street banks to discuss what help could be extended to these companies.

The issue would in any circumstances be a pressing political concern. But it becomes still more vital in the context of a £37 billion bailout of the banking sector. As part of that scheme, the Government, on behalf of the taxpayer, has taken substantial equity holdings in three of the banks: Royal Bank of Scotland, HBOS and Lloyds TSB. As these companies are now quasi-public concerns, the question properly arises of what the Government should do with its shareholdings. In particular, should the Government require the banks to meet certain targets for lending - either in volumes, or in interest rates charged? What is the purpose of taking public stakes in the banks if the banks' strategies are left unaffected?

It was for most of the last century a central aim of social democratic parties to take public control of the commanding heights of the economy. The idea of nationalising banks made sense in this scheme in order to meet broader concerns than narrow commercial criteria. For Labour finally to attempt, in however piecemeal and exhortatory a way, to affect the lending behaviour of the banks will be sorely tempting. But it is a temptation to be resisted.

Government has three functions in the financial crisis, and three alone: to establish more effective regulation; to recapitalise the banking system so that the economy can function once more; and to minimise the cost to the taxpayer. Regulation demonstrably needs improvement. Banks have failed to protect depositors, and have by their previous lending behaviour contaminated the rest of the economy. It is reasonable to expect the banks to institute reforms in their own organisation as the price of the bailout, because the taxpayer is - by design, otherwise the plan to recapitalise the banks would not work - overpaying for the banks' assets.

But those measures must take the form of gains in efficiency and transparency, not the replacement of sound financial principles with more amorphous social ones. There is not, for example, a genuine market in the compensation of banking executives. Chief executives of banks have been cushioned from the cost of failure by generous severance provisions - as happened with the management of Northern Rock. There are also reasonable concerns about whether banks, in normal economic times, are operating like a cartel in heavily penalising customers for unauthorised transactions.

These are issues in which the Government has a legitimate interest. But the overriding concern of the Government must be to sell the taxpayers' stakes, at the proper market price, as soon as economic conditions allow. Government has far too many crucial functions in economic management to run commercial enterprises as well.