That means that less credit will be available for consumers and businesses, and that will mean less economic activity in the months ahead.  When economic activity slows down, more businesses fail, more layoffs happen, and more consumers start defaulting on their debts.  Of course if economic conditions steadily deteriorate it will cause financial institutions to get even more stingy with their money.  It appears that a vicious cycle has now started, and I believe that this will be one of the biggest stories of the next 6 months.

Earlier today, I was quite alarmed to read that the top economist at Citibank is now publicly warning about the possibility of a substantial credit crunch in the months ahead…

Citi's chief economist Nathan Sheets says the US may be headed for a credit crunch and a recession in the coming months, citing the Federal Reserve's monetary tightening and ongoing fallout from bank turmoil.

So how soon will it be before things start getting really bad?

According to Sheets, this credit crunch could "unfold in [the] coming months and quarters"…

"We've moved from what I've called the acute phase of the [bank] stresses, where it's about bank runs and uncertainties about institutions failing," the firm's top global economist said. "[This is] where banks are thinking about their balance sheets and asking themselves: 'Well, can we continue to extend credit in the same way as we have over the last several years?'"

Sheets added: "And as a result of that process, we believe that there could be a credit crunch in the economy. That's something that will unfold in [the] coming months and quarters, and could indeed make that recession that we're expecting somewhat longer than it would be otherwise and somewhat deeper."