Now investors are beginning to worry that bad loans could make the situation worse - with implications for banks worldwide.
So far, the banks' profits have not been affected. Several of them reported solid profits this week, not as good as they used to be, but in line with expectations. However, all of them warned that they were experiencing an increase in problem loans.
As a result, a growing number of lenders are being forced to boost their reserves and write off billions of dollars in loans.
"The amount of debt will be a very important contributing factor towards bringing on a recession," said Bill Meehan, chief market analyst at Cantor Fitzgerald.
Mergers going wrong
There is concern that the rapid consolidation of the banking sector in recent years may have gone wrong.
There have been more than a few examples of poor compatibility among the merged companies.
First Union's acquisition of CoreStates Financial is often cited as one seemingly "indigestible" merger, which caused many CoreStates customers to flee.
Analysts agree that the merger wave has resulted in a 'new paradigm', a new era for the financial sector - and thus contributed to investor nervousness within financial stocks.
Scared investors
Bank of America shares, for example, fell nearly 7% in one day because of its loans to troubled Californian utilities. The energy firms are being overwhelmed by a combination of rising fuel costs and a cap on electricity prices resulting from deregulation.
Bank of America now says that it expects loan losses in 2001 to total $3bn, compared with $2.4bn at the end of 2000 and $2bn for 1999. The announcement follows December's revelation that it would report $1bn of uncollectible debt in the fourth-quarter.
Some analysts say that the number and amounts of the loans are not enough to severely hamper the US economy.
But as US economic data show continued slowing of the economy, other experts are not quite so quick to wave aside the impact of the bad loans.
Credit crunch
As individuals see more layoffs and the unemployment rate rises, "many of them [will] wisely start to pay down some of that debt and/or save whenever possible", says Bill Meehan of Cantor.
Pierre Ellis, senior international analyst at Primark Decision Economics, counters that the undisciplined nature of the lending has to be weighed against the massive expansion the economy has undergone in recent years.
"As the economy undergoes a long distance with no downs, risk-taking rises," Mr Ellis says. "The quality of new credit diminishes", exposing banks to additional credit risks.
Mr Meehan adds that it is all part of the normal business cycle. "[Banks] start getting lax with lending standards when they should be tightening, then they tighten when they should probably begin lending again".
In a slowing economy, the credit worthiness of every borrower gets called into question.
And so the problem for the US could be that, contrary to the conventional wisdom, credit conditions are now too tight.
As the world's largest economy continues to cool from its overheated state, banks and other lenders will become more cautious, leaving some of the country's most vulnerable business and consumers wanting for much needed cash.
While the prevailing wisdom says the economy is in for a soft landing, as Mr Meehan said: "There's a reasonably good expectation that we won't be able to sidestep a recession".