It is somewhat surprising that there is not already rioting in the streets,
given the gigantic fraud perpetrated by the financial elite
at the expense of ordinary Americans.

Bear Stearns marks the moment when the global financial crisis went critical.
 Up until last Friday, it had been possible - just about - to believe that the worst
was over and that things were about to get better.

That pretence was stripped away when JP Morgan, at the behest of the Federal Reserve,
 stepped in when the hedge funds pulled the plug on the fifth-biggest US investment bank.
It is now clear that no end is in sight to the turmoil, and the reason for that is that the Fed
and the US treasury are no closer to solving the underlying problem than they were
eight months ago.

The crisis will only end when house prices stop falling and banks stop
 racking up huge losses on their loans. Doing that, however, will require
 the US government to intervene directly in the real estate market to end
the wave of foreclosures.

Ideologically, it is ill-equipped to take that step and, as a result, property
prices will fall and the financial meltdown will go on and on. Ultimately,
though, action will be taken because there will be political pressure for it.

 Indeed, it is somewhat surprising that there is not already rioting in the streets,
given the gigantic fraud perpetrated by the financial elite at the expense of
ordinary Americans.

The US has just had its weakest period of expansion
since the 1950s. Consumption growth has been poor.
Investment growth has been modest. Exports have been sluggish.
 But if you are at the top of the tree, the years since the last recession
 in 2001 has been a veritable golden age.

 Salaries for executives have rocketed and profits have soared,
because the productivity gains from a growing economy have
 been disproportionately skewed towards capital.

 Patriotic For ordinary Americans, though, it has been a different story.
 Real wages have been growing slowly; at just 1.6% a year on average
over the latest upswing, well down on the experience of earlier decades.
 Business, of course, needs consumers to carry on spending in order
 to make money, so a way had to be found to persuade households
 to do their patriotic duty.

The method chosen was simple. Whip up a colossal housing bubble,
 convince consumers that it makes sense to borrow money against
 the rising value of their homes to supplement their meagre real wage
 growth and watch the profits roll in. As they did - for a while.

Now it's payback time and the mood could get very ugly.
Americans, to put it bluntly, have been conned. They have been duped by
 a bunch of serpent-tongued hucksters who packed up the wagon and made
 it across the county line before a lynch mob could be formed.

 The debate now is not about whether the US is in recession but how deep
 and long that recession will be. Super-bears have started to say that this
 is perhaps "The Big One", by which they mean the onset of a new
Great Depression. The need to rescue Bear Stearns has done little to
 still those voices.

As the economics team at HSBC recently pointed out, there has been a
"catastrophic breakdown" of trust, and when that has happened in the past
- the US in the 1930s, Japan in the 1990s - chucking extra money at the
 banks in the hope that they will start lending again proves ineffective.

 It's not hard to see why trust has become such a rare commodity:
Wall Street at the height of the securitisation mania had, in effect,
become London at the time of the South Sea Bubble crisis in 1720.
 Vast quantities of funny paper were changing hands even though those
involved in the deals had no idea of their true worth. Nor did they care.

 Inevitably, now the bubble has burst and the huge Ponzi securitisation
scam has been exposed, there has been a reaction. The securitisation
market is dead, there is less money sloshing round the system, banks
are hoarding their cash. Having allowed the housing boom to rage out
 of control for too long and then delaying cuts in interest rates until the
 housing market was gripped by recessionary forces, the Fed is now
trying to make up for lost time with a burst of hyperactivity.

It will cut interest rates on Wednesday and keep cutting them: financial
markets expect the Fed funds rate to be 1% by the summer, and they
 are probably right.
In most downturns, easier monetary policy does the trick.

 Lower interest rates make it cheaper to borrow and also change the
 trade-off between saving and spending. This may not be the usual
sort of downturn, however, with consumers going through a period
 of debt revulsion after the excesses of recent years, even so the
consensus is that after two or three quarters of falling output, a slow
 and sluggish recovery will be under way.

 Deflation These hopes are likely to be dashed, unless there is intervention
at home and internationally to tackle the crisis. Domestically, the priority
 should be to stop homes that have been foreclosed being auctioned
 on the open market, since by selling them at a 50% discount property
 prices are driven down.

The US does not seem to have learned the lessons from Japan, which
encouraged a fire sale of property in the 1990s and was sucked into
 a classic debt deflation trap as a result. Those who argue, with some
 force, that it would be counter-productive to intervene in the market
because the US needs to work the rottenness out of its system must
recognise that the cold turkey option will be very long and painful.

 The second form of intervention should be to shore up the dollar,
the collapse of which is worrying countries that rely heavily on exports
 and is the main reason for the surge in commodity prices.



You don't solve the problems of a collapsing bubble by blowing
up another, which is what Alan Greenspan did after the dotcom fiasco in 2001
 - the most irresponsible behaviour of any central banker in living memory.

 The lesson is that there has to be far stricter regulation not just of the
 US real estate market but of Wall Street, to prevent the return of irresponsible
 lending as soon as the recovery is firmly under way.

If this isThe Big One, one of the only consolations will be that the strength of the
 US economy will put a new New Deal on the political agenda. But for this to
 happen there has to be a political response and even though this year's presidential
election will be held in the shadow of recession, there appears not to be a potential
FDR among the contenders for the White House.

Yet if this crisis really does get as bad as some are forecasting,
 the public will rightly demand more than a slap on the wrist for Wall Street.