Total American consumer debt stands at $2.564 trillion. It had gone down three months in a row before expanding by $1.8 billion in January.

The consumer credit report comes out today and demand for credit is expected to resume its fall. Total debt is expected to decline by $1.5 billion in February.

Consumers are certainly feeling the pinch. Equifax reported last month that…

• Total personal bankruptcy filings rose 25 percent in January from a year ago
• Almost 40 percent of homeowners with subprime credit scores of 619 or lower were 30 days or more behind on their loans
• The number of credit cards fell by 30 million since the July 2008 peak to 408 million in January.
• 18.8 percent more auto loans were 60 days behind on their payments compared to the January before.

Despite all these headwinds, a small uptick in big ticket orders recently may indicate that lower interest rates on mortgage loans are loosening up consumers’ wallets.

I’m looking for the February consumer credit report to beat expectations. But consumers aren’t out of the woods. As long as home prices continue to decline and the economy continues to lose over 600,000 jobs a month, consumers will be reluctant to spend on credit.

Source: Consumers Are Still Playing Defense

And that figure, incidentally, doesn’t include the additional losses from secondary-prime mortgage loans, auto loans, credit card balances, student loans and the other credit-related flotsam and jetsam floating around in the debt markets.

That suggests that the hundreds of billions of dollars in emergency capital infusions from the world’s central bankers we’ve seen to date may only be a fraction of what’s ultimately needed by the time fully leveraged figures are thrown into the mix.

Second, liquidity conditions now may actually be worse than when the entire credit-crisis mess began to unravel this time last year. For example, the benchmark London Interbank Offered Rate (LIBOR) remains higher than so-called “policy rates” and U.S. Treasuries of comparable maturities.

This suggests that banks still don’t trust each other and therefore are keeping so-called “Interbank” borrowing rates high in order to reflect what they perceive to be the added risk of doing business. We’ve been warning investors to watch out for this since as far back as April, and have generally been preaching caution since the credit crisis began last year.

In other words, the fact that Libor-Treasury spreads are wider today than they were a year ago suggests that the banks really don’t know who continues to hold the toxic debt instruments the entire world has come to fear – despite a recent earnings parade of CEOs making claims to the contrary.

The upshot: Many institutions are hoarding cash – something you’d hardly expect to see if the credit crisis were really on the mend.

Third, judging from recent reports, it’s beginning to dawn on financial regulators that this crisis was never about a lack of liquidity in the first place, which is something I suggested in an open letter to U.S. Federal Reserve Chairman Ben S. Bernanke some time ago.

Instead, this crisis is about three things:

• Too much liquidity.
• Fundamental structural problems in the credit industry, including the almost-total lack of regulation.
• And the lack of transparency of complex financial instruments for which there is no public market, making them tough to value and nearly impossible to trade.

It is becoming clearer by the day that – partly because of these three factors – a good deal of money has been made fraudulently, if not illegally.

Granted recent changes surrounding the “mark-to-market” accounting of so-called “Level 3″ assets are a step in the right direction. But what few people realize is that, in the short-term, these new requirements could involve the immediate recognition of even larger losses than we’ve seen to date.

The reason is that many of the firms involved – think Merrill Lynch & Co. Inc. (MER), Lehman Brothers Holdings Inc. (LEH) and Citigroup Inc. (C), for example – will no longer be able to hide their losses in Level 3 assets, as they have in the past.

As you might expect, there’s a counterargument to this, and it’s a highly popular one on Wall Street – especially inside the CEO set, whose members desperately want to stop the financial hemorrhaging their firms are enduring. They claim they’re “selling” risky assets and “de-leveraging” their balance sheets.

But here’s what they are not telling you.

Even though these folks are technically “selling” assets – particularly the distressed “Level 3″ assets I mentioned a bit earlier – what they are really doing is assigning the upside to hedge funds, private equity firms, and sovereign wealth funds in exchange for cash.

And here’s the kicker: The banks actually are holding onto the downside liability in the event the underlying securities go bad. That brings us back to the start of this commentary, when I said that I expect more securities to go bad.

No matter how you look at it, these financial institutions are playing a vicious shell game, hoping all the while that they’re not the loser who is taken to the cleaners when he picks up the wrong shell.

Where this goes from bad to worse is that at the same time they’re playing more fancy accounting tricks, these firms continue to pony up to the Fed’s private backdoor lending window for sweetheart financing. After all, they can’t get the financing anywhere else.

That means that every taxpayer in this country is involuntarily being put in the bailout business.

As for whether or not we’re near the end of the credit crisis as a whole, it depends on whom you ask.

When this crisis started a year ago, I was asked a similar question and answered it by saying that we would not even begin to approach the end of the line until the total losses exceeded $1 trillion.

My audience chuckled politely.

Fast-forward 12 months, and nobody’s laughing anymore – especially when I say that I’m now raising my industry loss estimate to nearly $2 trillion.

Increasingly, other analysts are embracing a similar viewpoint. UBS AG (UBS) raised its estimate of the total cost of the credit crisis to $600 billion, while noted hedge fund manager John Paulson suggested $1.3 trillion is not unthinkable. Meanwhile, in a report issued last May, the International Monetary Fund (IMF) projected the bailout costs at $1 trillion.

All of this leads us to a single conclusion: At least for now, this is a “recovery” in name only.

Source: Three Ways to Know When the Credit Crisis Hits Bottom

Detroit’s “Big Three” automakers – GM, Chrysler, and Ford Motor Co. (F) – are in need of government assistance after being pushed to the brink of bankruptcy by slumping sales and increased foreign competition.

GM has been in talks with Cerberus Capital Management LP about buying Chrysler since September. But GM’s inability to secure financing at a time when credit is hard to come by and auto sales are in decline has left GM with few options other than appealing to the government.

GM spokesman Greg Martin said Monday that the company has asked the U.S. Treasury to broaden recently passed legislation, intended to bolster banks and financial institutions, to include auto companies. “We believe the federal government should consider using all the tools available to it, including some recently enacted, to support industries that are in distress and that are essential to the U.S. economy,” Martin told the New York Times.

Earlier this month, Congress gave the Treasury Department the authority to spend up to $700 billion to take equity stakes in ailing financial institutions and buy up troubled assets. While automotive companies would not be eligible for cash injections, the government could end up purchasing bad auto loans from the financing subsidiaries of Detroit’s automakers, an anonymous source told Reuters.

Meanwhile, the Energy Department could release $5 billion in loans to GM to help it finance the merger. The money, according to The Wall Street Journal, would come from the $25 billion approved by Congress last month to help domestic manufacturers make more fuel-efficient cars.

The White House yesterday (Tuesday) confirmed that the Bush administration has been in talks with GM.

“I can tell you we’ve been in contact with automakers, GM and others,” said White House spokeswoman Dana Perino. “And beyond that, I’m just not able to comment on any of those discussions.”

GM desperately needs funding, as the company lost $18.8 billion in the first six months of the year, and is hemorrhaging about $1 billion in cash each month. That has raised the prospect of bankruptcy for the company. GM had $21 billion as of June, but a merger with Chrysler would give the company access to another $12 billion in cash.

Should any of Detroit’s Big Three go bankrupt the consequences for the U.S. economy would be severe. Together, the companies employ more than 200,000 Americans, and support millions more U.S. workers indirectly through suppliers and dealerships, The Times reported.

The unemployment rate hit 6.1% last month and continues to rise. Some analysts anticipate the jobless rate could climb as high as 8.5%-10% next year. With a jobless rate that reached 8.7% in September, Michigan has the highest unemployment rate in the country.

Source: GM, Chrysler Merger Could Get Government Backing

So far this year, $736 million in municipal bonds have defaulted. That doesn’t necessarily mean they didn’t pay investors; they may have just drawn down reserves. That’s what happens just before they stop making payments to bondholders.

During all of 2007, only $226 million in municipal bonds defaulted, according to the May edition of the “Distressed Debt Securities” newsletter, published in Miami Lakes, Florida.

“This is peanuts, at least so far,” says contrarian blogger Mish Shedlock. “However, Ambac (ABK) and MBIA (MBI), both of which are the equivalent of the walking dead, are staring at more nails in their coffins should municipal bond debt head south in a big way.”

“For the most part, however, 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.