Both the Wall Street Journal and New York Times ran stories this morning about how small businesses and entrepreneurs are "feeling the chill" as banks squeeze cash flow to a mere trickle. Mounting defaults on loan portfolios, fear about future losses and frozen short-term money markets are forcing banks to deny credit in droves. 

As the banking system continues to jam years of consolidation into a few weeks, the survivors -- Wells Fargo (WFC), Bank of America (BAC), JPMorgan (JPM), Citigroup (C) TD Ameritrade (AMTD) and countless small, regional banks -- must choose between customers and shareholders.

Extending credit to customers and thereby maintaining sometimes longstanding relationships runs the risk of wasting precious balance-sheet space on what could be a losing bet. Washington Mutual and Wachovia (WB) both experienced firsthand what happens when banks load up on what turn out to be bad loans.

On the other hand, banks make money -- well, they used to, anyway -- by the simple business strategy of borrowing cheap (deposits), lending out at higher rates (mortgages, credit cards, construction loans, etc.) and picking up the spread in the middle. If they don't engage in this, their core business, future earnings prospects could be dire.

Banks must carefully balance continuing profit-generating business while protecting against future losses. And with the risk management track record many have racked up in the past year, it shouldn't come as a surprise if most choose prudence over profits in the years to come.

Meanwhile, back on Main Street, business owners who just weeks ago couldn't spell "credit default swap" are starting to learn why the tangled web of untested, unregulated financial derivatives that tied the world's financial system together matter to even the smallest of businesses.

It''s official: This is no longer just Wall Street's problem.

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