This is the week that the credit crunch became personal.

The big banks are suffering from a vicious circle brought on by the squeeze on their money supply that is damaging their business and our mortgages - and the average consumer is about to become sickeningly and personally acquainted with it.

Take Bank A. Its whole way of business is funded by borrowing. The squeeze means that cheap sources of debt have dried up and the other banks, which used to lend to Bank A, are not willing to keep funding its debt habit. Bank A’s ability to keep funding its business is in doubt. It retrenches, stops spending on gaining new business and crosses its fingers in the hope that things will magically get better.

So far, so familiar. But now take the average consumer couple, with a mortgage, a credit card, perhaps a car loan. Mr and Mrs Average’s whole way of life is funded by borrowing. The credit crisis means that cheap sources of debt have dried up and the banks, such as Bank A, are no longer willing to keep funding the Averages’ debt habit. They are retrenching, cutting down on savings and retreating from the housing market.

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The Averages, like Bank A, are crossing their fingers and hoping that things will magically get better.

There are parallels between the squeeze on the banks and the squeeze on consumers. But Mr and Mrs Average are facing additional problems caused by inflation. Long believed to be almost extinct, inflation is making worrying inroads and consumers are starting to feel the pinch.

This week a host of inflation-busting increases come into force: on utility bills, council tax and petrol. Mr and Mrs Average’s household bills are climbing, and their wages are not yet compensating for this. The Treasury is not suffering; the tax take has grown from 35.7 per cent of GDP in 1997 to 36.8 per cent in this tax year.

Nonetheless, the looming pain would be manageable were it not for the unfolding crisis in the mortgage market. Most of us are in unfamiliar territory - we are used to a mortgage market in which lenders fall over one another to offer ever cheaper deals. We are now seeing a market in which lenders fall over one another to offer ever more uncompetitive deals. In the current climate the last thing any lender wants is anyone actually borrowing from them.

This is creating a bizarre parallel universe in which lenders compete to be bottom of the best-buy tables.

The crunch has turned into a mortgage squeeze. Part of the reason for this lies in the continued unwillingness of banks to lend to each other, which makes it near impossible for them to fund cheap deals. Bankers are retreating to old models where mortgages are backed by savings; but we are not saving enough to fund our thirst for borrowing.

Northern Rock, that enduring symbol of the banking crisis, continues to send ripples of misery out into the market. Once Britain’s fastest-growing lender, it is now its fastest-shrinking lender. About £30 billion of Northern Rock loans reach the end of their terms each year, and the bank cannot renew them - especially while it is paying off its £24 billion debt to the Treasury. The mortgage market, already suffering from the credit crunch, is finding it difficult to absorb the Rock’s unwanted customers.

So mortgages are getting rarer and more expensive, just as the confidence is beginning to seep out of the housing market. Into this mire steps Mervyn King, the Governor of the Bank of England, who has the power to cut interest rates when the Monetary Policy Committee meets next week. But just as Mr and Mrs Average are caught in a vice of rising inflation and mortgage misery, so is the Governor. If he cuts rates, he runs the danger of fuelling inflation - but doing nothing will hardly support the faltering mortgage market.

Even if Mr King does defy expectations and cut rates, however, this may not have the desired effect. The problems facing the banks and the mortgage market run deeper than a single rate cut can reach.

The really worrying idea for Mr and Mrs Average is that Mr King and the Treasury seem powerless to unwind this mess. Everyone, from the banks to the Governor, seems to be crossing fingers and hoping.