The Credit Crunch Cuts Deeper and Wider

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Mistrust Among Banks

U.S. consumers can still get credit cards, but banks are less interested in allowing customers to transfer balances at low interest rates, Ellis says. In any event, credit cards with 20% interest rates are a poor substitute for lower-rate home equity loans. As housing prices have fallen, banks have drastically cut back home equity lending.

And then there are lingering threats of more losses at banks, or further bank failures.

"Banks must really convince each other of being sound," says Gambera. More writedowns and mortgage losses might persuade the industry that the bulk of losses have finally been wrung out of the system. Even now, most banks believe most other banks are financially secure, Gambera says, but they're reluctant to lend to each other because they're uncertain exactly "who is not O.K."—that is, which banks might fail and be unable to repay their debts.

Can Exports Save the Day?

When it comes to the credit crunch, nearly every problem eventually leads back to the poor condition of the U.S. housing market. Hembre believes the credit environment will remain knotty until home prices stabilize. "The biggest component of the credit markets is mortgages," he says, so the credit crunch won't end until the housing market works out the vast oversupply of homes.

But the housing sector's ills could take years to work themselves out, absent a massive effort by the U.S. government to revive the housing and credit markets.

Some economists hope that a jump in U.S. exports can keep the economy chugging along in the face of the credit crunch. Strong exports helped contribute to the 1.9% rise in U.S. gross domestic product in the second quarter. Calling this "a remarkable improvement," Gambera says a sustained rise in exports would be "the best hope we have for the economy turning around."

The Virtues of Thrift

A slowdown in the world economy, however, raises questions about whether the U.S. export boom can continue, Hembre notes.

When it comes to the credit crunch, there is a growing suspicion that Americans are witnessing not a temporary crisis, but a permanent shift in the way the U.S. economy operates.

"I really don't think things are going to [go] back to normal," Wolfer says, because the U.S. economy is shifting from a reliance on debt and consumer spending to an emphasis on saving and exports. "This is going to be a painful process," he says.

The nation Wolfer envisions would be stronger and more secure, with less debt and greater savings. For now, that's little comfort to investors dealing with the dismal conditions of the present.

Steverman is a reporter for BusinessWeek's Investing channel.