(FORTUNE Magazine) – When it comes to recessions, economists believe in a simple rule of thumb: Pump money and credit into an ailing economy, and before long you have a recovery. The bigger the injection, the stronger the rebound. So between Alan Greenspan's yearlong campaign to slash interest rates and the government's latest stimulus package, totaling $75 billion, we should get one mind-blowing recovery, right? After all, the last time we pumped so much money into the economy was in the early 1960s, and things turned out pretty groovy back then.

Unfortunately, it may not be so simple this time. Eight months into this recession, consumers are still buying big-ticket items like cars and homes. While that has kept the economy from totally tanking, it leaves little pent-up consumer demand to drive a fast recovery. So it's all up to corporate America--which, you'll recall, got us into this mess in the first place. As Mark Zandi, chief economist of Economy.com, puts it, "The difference between a strong recovery and a disappointing one will depend on business investment."

And on that score, there's cause for concern, if not outright agita. Most worrying are early signs of a credit squeeze as banks tighten up on corporate lending. If that continues, the recovery may not be right around the corner, as many economists are now predicting--or if it is, it won't feel like much of one. Here's what's going on.

Since the terrorist attacks of Sept. 11, many banks have turned hypercautious. According to the Federal Reserve's survey of senior loan officers, the most comprehensive picture of banks' willingness to lend, 51% of domestic banks restricted their lending in October, up from 40% in August. Foreign banks became just as wary, and the tougher credit conditions are affecting firms of all sizes across the country. "We've become more conservative in our lending," admits George Andrews, president of Capitol City Bank & Trust in Atlanta. "We're turning down customers we would have lent to a year ago."

Banks are making it tougher for business to borrow in other ways too. According to the same Fed survey, more than half of domestic banks in October raised the rate they charge on riskier corporate loans. At the same time, a growing number of banks have imposed more stringent loan covenants and collateral requirements on large and medium-sized companies. All this took place even as the Fed was slashing short-term interest rates to stimulate business investment. Indeed, as we'll see later, what should be one of the best times ever to borrow money isn't turning out that way at all for most companies. There's one notable exception--large, well-known firms have taken advantage of a bonanza in the corporate bond market--yet here, too, that borrowing window seems to be closing as the market for commercial paper, for example, has dried up.

So what's making banks so jittery? Blame Osama. Jay Sidhu, CEO of Sovereign Bank in Pennsylvania, says Sept. 11 introduced a lot more uncertainty for corporate earnings, leading banks to worry about the quality of loans. "Suddenly a firm that expected sales of X was not going to achieve that, and it made us more cautious," he explains. "I think the majority of banks reacted in the same way." Now Sidhu is looking for tangible improvement in the economy before he's willing to lend freely. In particular, he's closely watching consumer confidence, employment, and investment in technology for signs of a sustained rebound.

Once Sidhu becomes less squeamish, other bankers probably won't be far behind. "Bankers are herdlike in their behavior," says Zandi. "They've trained in the same way, go to the same conferences, and talk to one another, so when one bank makes a change, the others follow." The trouble is, even when banks become more optimistic, there's a lag effect before easier credit benefits the economy. Researchers at the New York Fed have found that it can take at least three months from the time banks increase the availability of credit to when firms spend the funds.

So how bad could it get? Think back to the last time banks lost their nerve--the early 1990s. Although it's hard to remember anything negative happening at all during the 1990s nirvana, we did experience a full-blown credit crunch at the start of the decade. That's the reason the recovery from the 1990-91 recession felt so lackluster. In fact, the media dubbed it the "jobless recovery" because firms simply couldn't get the funds they needed from banks to expand operations and hire more staff. At the time, remember, banks were saddled with bad loans following a commercial property bust. Happily, that's not the case today. "Right now we don't have anything like the real estate crisis of the late '80s," says Richard Berner, Morgan Stanley's chief U.S. economist. "It's not about a problem with capital but with confidence." Still, another corporate collapse a la Enron, and banks might find their capital base isn't as strong as they thought. That's one of the things about economic slumps. Loan quality can deteriorate virtually overnight.

While we may well avoid a Grade A credit crunch this recession, it's clear we won't return to the days of easy money that financed the boom of the '90s anytime soon. The main reason is that the conditions for business investment aren't nearly as ideal as they were in the 1990s. As the recovery got under way back then, Washington was reducing the federal budget deficit, which brought long-term interest rates down steadily. Today we face the opposite situation. The surplus has vanished, and the prospect of mounting deficits is fast becoming reality. That's one reason long-term interest rates have hardly budged this year although official short-term rates plunged from 6.5% to 2%. Since Greenspan started cutting rates in January, 30-year bond yields have edged down from 5.5% to a mere 5.35%, and ten-year yields went from 5.31% to 5%.

While the talk on Wall Street is all about recovery, with markets staging a dramatic rally since their post-Sept. 11 lows, the business environment remains grim--profit margins are at 19-year lows, there's excess capacity at every turn, and aggressive price discounting is rampant. Not exactly the best combination to encourage firms to invest now, is it? And that's reflected in the latest figures, which show that the steep decline in business investment that began a year ago is continuing today. Real business spending on plant and equipment dropped 11.9% in the third quarter, and new orders for capital goods in November suggest a further sharp drop for the fourth quarter. "Both leading indicators and current conditions point to further declines in capital spending," says Prudential economist Richard Rippe. "We're expecting next year to be just as weak on an annual basis."

So are we looking at a replay of the jobless recovery? One discouraging sign: The unemployment rate climbed to 5.7% in November, up from 5.4% the previous month. But that doesn't mean all is lost. After all, the anemic recovery at the start of the 1990s was followed by some pretty good times.

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