There can be no real recovery without the private sector, and credit is collapsing for consumers and business. These two charts show the businesses are not able to borrow and consumers are not able to get credit. On the consumer side, overall credit is declining at 5%/yr and revolving credit (credit cards) is declining even faster at 8%. Business loans are down 12% yearly, and in the last three months a frightening drop of 19% annualized for total loans and a 28% annualized in commercial loans. This means the credit crunch is accelerating.

One of my investments is living this nightmare. Their sales will triple this year in a bad market for retail products, but they have a difficult time getting a line of credit even when backed by real assets - receivables - and have to pay an effective rate of 15%.

The public looks at the extremely low Treasury interest rates & deposit interest rates, and presumes that businesses can borrow close to them. Instead, normal everyday commercial credit is run up to usurious levels. And almost everyone knows someone who has faced seemingly rapid and arbitrary increases in credit card rates to a stunning 28%. New accounting rules which are supposed to enhance transparency may make consumer credit even harder to get.

The reason for the worsening crisis is the way the Fed has handled the situation, as described the Run on the Dollar post: by burying the toxic debt inside the Fed, they have postponed the day of reckoning for the banks but have not cured it.

You can see in the chart how much the Fed has buried, inside their Maiden Lane vehicle and using the TALF program. Total bank reserves have hit an all time high.A huge chunk of it (70%) are "non borrowed reserves" which as best as I can figure from the Fed's gobbleygook are the reserves burined int he Fed. They are not being used for active lending.

This postponement has consequence. The banks have apparently taken their reprieve and used it to speculate in bonds and equities - the current Obama Hope Rally. Yet they are still tightening credit and pulling back on lending because the buried reserves lock up lending capacity. After all, at some point the Fed will swap them back! And then the banks will have a much harder time avoiding insolvency, since these assets will have to be marked down due to their lack of liquidity and the underlying distress of the assets lent against (primarily real estate).