It’s now clear that the US economy is in far worse shape than even thought yesterday.

Figures overnight from the Fed on consumer credit show the biggest fall in the history of the recorded figures, and major industrial, Alcoa, suffered a 52% drop in third quarter earnings and has joined the mighty General Electric in eliminating a share buyback to conserve capital.

But in the most dramatic move, the Fed extended the boundaries of its “Lender of Last Resort” understanding; that is, by supplanting temporarily the frozen $US1.6 trillion commercial paper market, the day to day lifeblood for American business activity.

The Fed said it would set up a new Commercial Paper Funding Facility to buy trimonth debt from banks and non-financial companies.

The move was desperately needed with figures showing that 28% of the market would fall due this week. The Feds figures last Friday showed that in the week to last Wednesday, the market had shrunk by $US215 billion in the past three weeks and virtually all new lending was being done overnight.

If 28% to 40% of that huge amount can’t be rolled over, the US economy will be crunched by the end of October at the latest.

Without the Feds move to being a sort of bank, the US economy will crunch to a complete halt in a matter of weeks, throwing hundreds of thousands of people out of work and setting off a domino chain of corporate failures across all sectors, so the Fed had to act.

This freeze in the commercial paper market is why the likes of Alga and GE have cut their share buybacks and why Bank of America cut its dividend by 50% and is seeking to raise $US10 billion in new capital. It has had to support the acquisitions of Countrywide Financial Services and Merrill Lynch and the added burdens they will impose on its finances, and fund this from overnight money or not at all.

But it’s clear that consumers, the engine of the US economy, are being hurt badly, even before the latest intensification of the credit crisis.

They were being denied credit by banks and other lenders in August, well before the eruption of this latest phase and they were also cutting back on their demand for credit, so fearful had they become.

But there’s nothing the Fed can do immediately to ease the squeeze on consumers: each week tens of thousands of them are losing their jobs, their homes, having the pay cut and hours trimmed and are being denied credit at a rate not thought possible until the Fed released the credit figures for August, a month before the crisis worsened with the spate of failures and bailouts in the US starting with Lehman Brothers.