The credit squeeze is painful and will get worse. There's barely a crumb of comfort to be had from the Bank of England's latest credit conditions report.

Debt is being increasingly rationed, it is costing more and banks are demanding greater concessions from anyone with the temerity to request a loan. Meanwhile, defaults and loan losses are rising and going to rise farther.

Individuals and businesses have grown accustomed to debt being plentiful, keenly priced and liberally supplied with few strings attached over the past decade. The adjustment to this new world is difficult.

Some 27,000 families a week are coming to the end of benign mortgage deals and discovering that the cuddly lender of two years ago has turned into a stern puritan who wants a great deal more interest - if he's prepared to extend a loan at all.

The measures put in place by the Bank of England in April do not seem to have had much effect in getting banks to keep the lending spigot switched on, but nor were they meant to.

The £50 billion Special Liquidity Scheme - where take-up is thought to have been steady rather that spectacular - was meant only to restore confidence to the banking system and relieve strain in the wholesale money markets.

When ministers tried to suggest that the lifeline would help to bring back the days of plentiful cut-price mortgages, Mervyn King, the Bank Governor, was quick to contradict them. It would be “a serious mistake” to go back to those lax conditions, he said. This was an adjustment that needed to take place.

He is right. Loans need to be a bit harder to come by and a bit more expensive to help to iron out the economic imbalances built up over a decade and more.

Saving needs to be better rewarded and spending cut back - putting mortgage payments on the credit card will only postpone the pain, and probably make it worse. House prices - whisper it quietly - do need to come down. And growth needs to slow to help to keep the lid on inflation.

The danger, however, is that the pendulum swings too far. Since the credit crunch hit last August, the real economy had until recently seemed to react in slow motion. Given the earthquake in credit markets, the surprise was how resilient consumer spending remained and how cheerful business leaders outside the City continued to be.

But in the past few weeks there has been a marked speeding up in the souring of confidence among consumers and businesses.

The shock profit warning this week from Marks & Spencer, the best thermometer for measuring the economic temperature in Middle England, perhaps marked the moment when it became apparent how abruptly the economy is coming to a standstill. The slowdown in the services sector has also been very sudden, figures showed yesterday.

It's going to be unpleasant, but there may be some advantages to a very abrupt slowdown, as distinct from a gentler but more prolonged decline.

First, it may be enough to prevent base rates being raised here - something the eurozone nations, where rates were lifted by a quarter-point yesterday, have not been able to avoid in the face of rising inflation.

Secondly, the faster the deterioration, the sooner the bottom is reached and markets can find a new equilibrium.

Until house prices find a floor, the credit system and the wider economy will continue to flounder. It may just be better to get there sooner rather than later.

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