Home prices in Manhattan have remained largely immune from the housing crisis gripping the US… until now.

According to Reuters, the New York real-estate market is showing a significant reduction in new deals as Wall Street sheds staff to reduce costs.

“For the most part, the subprime crisis is past its inflection point,” says Eric Roseman in the Offshore A-Letter. “What matters now is how and when other credit indicators normalize.”

But Eric is highly dubious that credit markets have bottomed.

Sub-prime is now largely history. But other segments of the credit spectrum that have a far more profound impact on the American consumer are just beginning to unravel.

The consumer is now threatened by a liquidity crisis. Housing values continue to heavily contract and revolving credit installment debt is becoming harder to secure.

The culprit is less the write-downs themselves and more the virtual “shutdown” in the securitization market. At its height, the securitization market provided 66% of household borrowings in the first quarter of 2007. Without this market, consumer credit losses may be far worse than currently estimated.

Auto loans, personal loans, mortgage loans, and other segments of installment debt are still contracting. Auto loans are especially vulnerable with defaults recently hitting a 10-year high of 3.4% in March. And more Americans are dropping their house keys to their local lenders as housing values continue to plunge below the cost of their mortgages.

James Howard Kunstler in The Daily Reckoning considers the effects of oil scarcity and the housing bubble hitting at the same time: “The logical conclusion of all this is not what the American public wants to hear: we have become a much poorer society and are now faced with the unavoidable task of making major changes in how we live.”

All the three-card-monte moves at the highest level of finance lately amount to an effort to avoid the unavoidable, acknowledging our losses. Certainly the political fallout of all this will be awesome. But it’s not about politics, really. It’s about the entire society’s inability to form a workable new consensus of reality.

It’s hard to predict how long these institutions at the heart of our economic system can linger in the “far from normal” limbo of pretending that money has not been defaulted out of existence. Since the same process is underway in Great Britain and Spain, places beyond the control of Bernanke, Secretary Paulson, and the Boyz on Wall Street, and since actions and reactions there will affect the destiny of money here, its hard to escape the conclusion that we’re at most months away from the brutal recognition that Wall Street has managed to bankrupt itself (and, by extension, the United States).

This is dark heart of the matter of which no one dares speak.