KEY POINTS:
If you'd been in Volare restaurant in downtown Chicago last Monday, you would not have thought a US recession was imminent; the place was packed, as, earlier, was most of Michigan Avenue, the principal shopping street, despite the freezing winds.
But that was before Friday as news spread of the collapse of Bear Stearns, America's fifth largest investment bank. A mounting financial crisis threatens to undermine the economy that supports, among many others, the clientele of Volare.
The United States is about to be trashed by perhaps the greediest, most arrogant, self-deluding financial class in the country's history.
It is an epic tragedy whose ramifications are bound to impact on the rest of the world.
But politicians and policy-makers seem frozen into inactivity (with the honourable exception of the US Federal Reserve, America's central bank). In the UK, Messrs Brown (Prime Minister) and Darling (Chancellor) echo President Bush and US Treasury Secretary Hank Paulson; as little as possible must be done to regulate or impede the operation of the titans of Wall St and the City (London's financial district), whatever their recklessness.
Even Hillary Clinton and Barack Obama, slugging it out for the Democratic presidential nomination, are happier to talk about the threat to American jobs from foreign trade than the mortal threat constituted by an out-of-control and broken financial system. Yet to blame foreign trade for America's ills is both stupid and wrong.
The untold story of our times is of US industry not just holding the line but expanding production, a phenomenon gathering pace as the dollar plunges on world markets, promoting super US competitiveness. American brands and companies increasingly populate the world top 100 and the US invests stunning sums on its knowledge economy base - software, universities and R&D.
For the US to put its success at risk through protectionism, the stance taken by both Clinton and Obama, while indulging Wall St, is mad.
The heart of Keynesian economics was never tax and spend; it was the warning from the greatest economist of the 20th century that a financial system based on free-market principles inevitably destabilised the health and stability of capitalism. Keynes knew his ideas would be contested to the last because he threatened the orthodoxies of laissez faire and the fortunes of the financiers.
So it is proving again. For make no mistake - the global economy is under threat.
It is the slump in American property prices that has prompted the collapse of trust in Wall St. And the chief reason property prices are falling is an epidemic of repossessions caused because banks lent to poor, uncreditworthy borrowers. Then they disappeared, selling off the debts.
The Americans have invented a system with no commitment, trust or long-term human relationships and the result is mayhem. For the banks, there was a glorious byproduct. They could borrow to a stunning degree because they had, allegedly, spread their risk. Bear Stearns had US$11.8 billion ($14.48 billion) of capital and US$395 billion of debt.
When things are going well, it is "leverage" like this that creates the volume of business that generates incredible bonuses for their executives. When things go badly, the bank simply goes bust.
The unresolved question is a humdinger. How big is the void between all the debt and the actual, slipping, value of the property that is supposed to be sustaining it? And here's another: how many banks may go bust before the situation steadies?
Goldman Sachs estimates the gap at US$2 trillion, other say much more. Either way, it is large and the only way to save the US economy from a credit-crunch-induced recession is to try to narrow the gap by steadying property prices, while the banks are rescued.
So far, the chief activist has been the US central bank, the Federal Reserve, with the idea-lite Bush administration using the crisis to agree to tax cuts to stimulate the economy, its panacea for everything.
It was the Fed that earlier last week agreed to offer US$200 billion of support that would have helped Bear Stearns; it was the Fed that bailed out Bear Stearns itself; and it was the Fed that earlier slashed interest rates. Chairman Ben Bernanke has said he will do everything in his power to prevent a rerun of 1929.
But the Fed cannot shoulder the entire burden itself. The US government needs to put a floor under house prices by offering mortgage guarantees and prohibiting immediate foreclosures.
Nor should the rest of the world stand idly by. The impact of the financial crisis is rocking the dollar; the EU, Japan, China and the oil exporters need to co-ordinate massive foreign exchange intervention.
The Europeans and Britain should take a lead, must redesign and reregulate their financial systems fast to close down the scope for the kind of seizure that has hit not just Bear Stearns, but British, German and French banks and threatens more.
There must be a readiness to offer any troubled bank as much liquidity as it needs. This is not just an American, but global, emergency.
Above all, America's politicians, especially leading Democrats, need to stop blaming foreigners for America's problems while worshipping at the shrine of free finance. Instead, they need to nail the real culprits. On that the immediate future of the American - and the world - economy depends.
* Will Hutton is a columnist for the Observer.
