Currently it is claimed that lending is drying up because lenders are fearful of the credit worthiness of borrowers. That is self-evidently true. I assume lending is also limited because people are holding onto money balances to purchase assets which look like getting cheaper across the board. I notice that in the UK there are proposals to stop short-selling of bank shares to stop large investors driving down bank equity prices further - this is occurring in the face of doubts about the future of Britain's largest mortgage lender Hbos. The same proposals were passed into law during the Great Depression. Expectations about persistent future asset price deflation are, in part, driving a reduction in lending. Moreover, as people try to build up their real money balances this drives further deflation and economic contraction.
My macroeconomics is rusty but are we not in a type of liquidity trap?