If you’d been in Volare restaurant in downtown Chicago on the night of March 10, 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 March 14 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 US is about to be trashed by perhaps the 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 or finance minister) echo President Bush; as little as possible must be done to regulate or impede the operation of the titans of Wall Street 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.

For the US to put its success at risk through protectionism, the stance taken by both Clinton and Obama, while indulging Wall Street 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. 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 Street. And the chief reason property prices are falling is an epidemic of repossessions caused because banks lent to poor, uncreditworthy borrowers. 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 $11.8bn of capital and $395bn 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 Europeans must redesign 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. There must be a readiness to offer any troubled bank liquidity. Above all, America’s politicians 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 our economy — depends. — The Guardian