Because of a fragile commercial banking system, the central banks have been impotent in their efforts to pump up credit flows that will reach those who need it, including consumers and businesses.

'The banking system is in a state of potential seizure now,' said Mr Benjamin Pace, chief investment officer at Deutsche Bank Private Wealth Management With banks are hoarding their cash and refusing to lend to other banks, the interest rates charged for interbank loans has soared and made central bank moves to cut rates ineffective.

For example, the benchmark three-month LIBOR or London interbank offer rate, was hovering around 4.15 per cent on Thursday even as the US federal funds rate it is supposed to mirror was 2.0 per cent.

This means that 'right now about 200 basis points of Fed easing is not in the economy,' Mr Pace said.

It also means that any further rate cuts are unlikely to help get credit flowing, because they would not bring down the rates charged for consumers and business as would occur during normal times.

Mr Stephane Deo, an economist at UBS, said the interbank lending market for more than a week 'is virtually closed, which poses risks for bank refinancing'.

This means banks worldwide will have trouble rolling over their own debt, and with credit even scarcer, LIBOR rates could rise further in a vicious cycle for the banking sector.

The response of central banks has been to offer direct loans to commercial banks in a massive liquidity effort, hoping it will get the interbank lending market reopened.

Globally, the Federal Reserve has increased swap lines with other central banks, boosting the total to US$620 billion (S$893 billion) to get dollars to firms that need it. But this has done little to unfreeze credit markets.

'Now the depleted Fed is trying to bail out Europe,' said Mr Bill King, of M. Ramsey King Securities.

Where does all the money go? Ironically, the money pumped into the system by central banks has returned to those institutions because commercial banks are looking for safety instead of taking a risk with another troubled lender.

The European Central Bank, for example, offered the banking system 70.9 billion euros (S$102 billion) at a rate of 3.25 per cent. But a day earlier it had accepted 45 billion euros in its deposit facility at the same rate, according to Mr Deo.

'The credit markets are the center ring of the circus,' said Ms Liz Ann Sonders, chief investment strategist at Charles Schwab.

'Many areas of the short-term credit markets have almost completely broken down with little or no trading taking place at all. Central banks are the only providers of cash to the market right now as no one else is lending. This is tipping more and more banks towards insolvency' and forcing bank rescues.

Deutsche Bank's Pace pointed out that without an unfreezing of the credit markets, the US and global economy could find itself in deeper trouble and banks and companies fail to get cash when they need it. It could mean payrolls or supplies would go unpaid, jobs are cut and the economy heads south.

A continuation of the squeeze 'would turn a pretty mild and short recession into something deeper and longer,' he said.

'For most of this year, credit was ample, so it was a just a Wall Street crisis. But if when credit seizes up, all lending stops.'-- AFP