Montreal, Canada

Meredith Whitney, who accurately predicted the 2007-2009 credit crash and now runs her own consulting firm, is now warning of another credit unravelling.

According to Whitney, credit is still contracting. With the exception of large-cap companies, smaller-sized businesses are struggling to raise capital and the wider implications for the economy are bearish. Small companies employ 50% of the U.S. workforce and contribute 38% to GDP, or Gross Domestic Product.

"Equally worrisome are the trends in small-business credit, which has contracted at one of the fastest paces of any lending category. Small business loans are hard to find and credit-card lines (a critical funding source to small businesses) have been cut by 25% since last year."

Whitney also predicted a recovery in distressed bank shares earlier this year. Bank stocks have since surged more than 150% off their March lows. But now she stresses that small business credit is haemorrhaging – dangerous enough to derail an economic recovery the second half of 2009 and into 2010:

"I believe that we are only in the early stages of the second half of this credit cycle. I expect another $1.5 trillion of credit-card lines to be removed from the system by the end of 2010."

Over the last several months I've repeatedly pointed out that bank credit has been contracting – despite TALF and TARP. All those fancy and expensive acronyms aren't doing anything to boost small business and consumer credit in 2009. The trend in bank credit remains deflationary.

Whitney concludes her recent editorial in last week's Wall Street Journal (10/2/09, page A19) by warning regulators that new and impending credit card rules will probably adversely impact borrowers – already starving for capital. More companies will restrict credit as new regulations force lenders to tighten terms and duration.

The credit crisis is not over. The worst of the first panic is now behind us as governments guarantee insolvent financial systems since last fall. Bad debt or toxic assets remain on bank balance sheets and have been transferred to government credit risk. The problem hasn't disappeared.

Small business, which relies heavily on bank credit card lines and revolving loans, is now in the midst of a severe capital shortage. The noose is getting tighter.