The downfall of Wall Street icons like Bear Stearns and Lehman Bros. may have just been the warm-up.

Soon we may wave goodbye to a true American legend: General Motors.

Yes, it’s almost unthinkable that this century-old industrial giant could go the way of the DeLorean. But the maker of Chevys, Buicks and Caddies has been driven to the brink by lousy management, intransigent labor unions, high gas prices and an economic slump that has kept Americans off showroom floors.

GM cars are selling so poorly that revenue plummeted 45% in October. Its stock has slumped to levels not seen since the days when it introduced power steering. Cash flow has dried up to the point where 2009 could be the year that GM dies.

The government is debating a bailout for GM and its Detroit brethren of about $25 billion. But cash alone wouldn’t save GM, Ford Motor or Chrysler, a trio that can only facetiously be called the Big Three anymore.

Politicians would have to find the guts to stand up to the labor unions and the retirees taxing the companies’ resources. They’d have to find the courage to boot out the managers who led the automakers into this mess. Without those changes, a bailout would just be a bandage.

The alternative, using bankruptcy to slough off lenders and reorganize the way airlines have done, might not keep automakers alive either. Unlike an airline ticket, a car is a long-term purchase. Consumers say they wouldn’t buy a car from a company in bankruptcy because they worry that warranties and replacement parts might not be there when they needed them.

If I had to bet, I’d bet on a bailout — either right away in a vote on a loan package that could come in Congress as soon as this week or after Barack Obama takes over as president Jan. 20. But let’s hope real change comes with it.

Imagine the potential ramifications of losing just GM, the biggest of the Big Three.

Millions of jobs: General Motors employs 123,000 people, and losing those jobs would be bad enough. But GM’s demise could set off a chain reaction that might cost the country almost 3 million jobs. Here’s how.

General Motors regularly owes auto-part suppliers such as Delphi and American Axle & Manufacturing lots of money. If GM declares bankruptcy, a court could relieve GM of its obligation to pay off its debts to those suppliers, which could topple them. The death of GM could have a similar effect in the longer term.

“The ripple effect could be huge,” says Van Conway, a bankruptcy expert at Conway MacKenzie & Dunleavy in Birmingham, Mich., who has worked on restructurings and turnarounds in the auto sector.

“If General Motors goes down, their supply base will go down,” agrees Brett Smith of the Center for Automotive Research. That might disrupt production at Ford and Chrysler enough that those two car companies would fail as well.

In this disaster scenario, the upper Midwest could lose nearly 3 million jobs, the Center for Automotive Research calculates. It estimates the Big Three automakers employ about 240,000 workers. The car business supports an additional 974,000 jobs among suppliers and related companies, and 1.7 million jobs are created by all the money all those people spend.

Sure, foreign automakers with U.S. factories, including Honda Motor (HMC, news, msgs) and Toyota Motor (TM, news, msgs), would pick up some of the slack. But many of the cars they sell here, such as the hybrid Prius, are made abroad. So these companies wouldn’t do enough hiring to offset all the job losses, and they generally pay workers less.

The hit to the consumer: Yes, we’d all lose the option of buying GM favorites like the Malibu or the Silverado. You’d hear no more romantic songs about pink Cadillacs or red Corvettes.

But more seriously, the loss of domestic auto companies would cut the number of producers, which means less competition. The remaining automakers would raise prices, at least in the short term, predicts David Thomas, a senior editor at Cars.com. “You would be paying a lot more for a Toyota Corolla than you ever thought you would be paying.”

The hit to the press: Foreign automakers such as Honda, Toyota and Volkswagen spend far less on splashy newspaper ads than U.S. car companies do.

“That is one way they keep their costs low,” says Thomas, of Cars.com. So a GM failure would be another blow to an ailing industry already hit hard by subscription and revenue declines as readers and advertisers move to the Internet.

The cost to government: Lost jobs and lower wages means lost tax revenue. Federal, state and local governments would lose more than $156 billion in the three years after a failure of the Big Three in Detroit, the Center for Automotive Research estimates. That’s money that other taxpayers — or their children — would have to make up.

The demand for government services would likely rise as well, as many of the best-paid blue-collar workers in America started job hunting in a weak economy. Auto-sector pensions would have to be picked up by the government — a huge cost. And both autoworkers and the automakers’ retirees would likely need help with health care just as Obama and congressional Democrats were looking for ways to cover the uninsured.

The political cost: If one or all of the Big Three auto companies failed in the first year of Obama’s presidency, it could leave voters disillusioned, wiping out much of the good will he has built up and making it harder for him to lead on other issues. The loss of General Motors would also be a hit to our prestige as a nation. Americans share a passion and pride in their cars.

Mary Ann Bartels, technical research analyst at Merrill Lynch, notes in commentary Monday that the market has seen its classic selling climax — evidenced by 90% up days reached in October that “signaled the beginning of a base-building process.” She warns again, however, that the period of “testing” the lows can be long and arduous, and involve indexes falling to new lows.

Referring to Thursday’s action, which saw the Dow swing in a 900-point range in one day, she argues that this was likely the third test of the lows reached October 10. Still, she says that the market still has “its work cut out for it,” pointing to resistance levels of 960 to 1000 on the Standard & Poor’s 500-stock index and 9300 to 9405 for the Dow.

Ryan Detrick, analyst at Schaeffer’s Investment Research, is looking for a worsening of the current trend, pointing to the 21-day moving average of the International Securities Exchange’s put-to-call ratio. The current average is 1.35, far from the 2002 market low of 0.95.

The CEOs of General Motors (GM), Ford (F) and Chrysler overlooked this basic fact when they flew to Washington in private jets to testify before Congress.

“We want to continue the vital role we’ve played for Americans for the past 100 years, but we can’t do it alone,” GM’s CEO Rick Wagoner told the Senate Banking Committee.

Tom Schatz, president of a watchdog group called Citizens Against Government Waste, huffed: “This is a slap in the face of taxpayers. To come to Washington on a corporate jet and asking for a handout is outrageous.”

You’d think that insight would rate a “Well, duh” – but apparently not from the auto industry’s top dogs.

Wagoner’s trip to Washington in a G4 private jet cost his struggling company an estimated $20,000 roundtrip. A commercial flight booked online would have cost about $576 for coach and $1,674 first class round trip.

Sure, sure – a CEO’s time is more valuable than gold, but there are cell phones and e-mail to keep in touch with the galley slaves back in Detroit – and electronic gizmos work on commercial flights and even in airport terminals or taxis.

Ford CEO Alan Mulally’s $28 million pay package includes the use of a private jet. He lives in Seattle and the company jet zips him home on weekends, ABC News reports.

The Fed’s own balance sheet has exploded from roughly $900 billion worth of debt in August to around $2 trillion as of last week. Knowledgeable sources expect that to reach $3 trillion by the end of the year.

That means that it will have grown from approximately 6% of gross domestic product to more than 20% in the space of four months. (For perspective, Japan’s balance sheet grew from roughly 9% of GDP to 29% over the 10-year period from 1994 to 2004, as it pursued “quantitative easing,” which basically involves the central bank making more cash available to banks to ease lending.)

These numbers and rates of growth are so enormous (and unprecedented) as to be utterly incomprehensible. Does anybody actually think the government has any idea what it’s doing?

I think it’s certainly dawning on folks that when the government “does something,” it often creates more problems than it solves. In this case, as it props up poorly managed companies, it may only be allowing them to rain further havoc on the better ones in their industry. American International Group is an example of this, and I’m sure many other financial entities will turn out to be as well. (As an aside, notice all the idiotic executives, across a wide range of industries, who have bought back hundreds of billions of dollars’ worth of shares at stupid prices — a classic example of blowing up their businesses in an attempt to manage the stock price.)

Though the government hasn’t admitted it yet, we are in a recession, and in this particular instance, it seems to me that creating jobs will be an unusually severe problem. That’s because the economic expansion we saw from 2002 to 2007 was essentially just a function of speculation (as I have stated often — and I explain in my book “Greenspan’s Bubbles”). I just cannot stop worrying about where the jobs are going to come from prospectively.

When I wrote that book, I pretty much exorcised my own demons regarding my revulsion and anger at the policies of former chief Alan Greenspan and his Federal Reserve. Recently, though, I couldn’t help but think how much better off everyone would be had the United States used the time after the equity bubble and the 9/11 attacks to pursue sound policies, as well as encourage folks to save money and prepare themselves for the demographic challenge of Social Security and rising health care costs.

Instead, Greenspan created a multiple-GDP-sized housing bubble, during which folks took on huge amounts of debt instead of actually saving money. It was only ridiculous financing (which has since imploded the banking system) that allowed so many folks to pay absurd prices for houses — and take money out of them at the same time via home-equity loans.

Of course, one of the most misguided government ideas was trying to prop up home prices. (Secretary Hank Paulson essentially conceded as much last Wednesday when he announced that the Treasury Department was abandoning its plan to purchase troubled mortgage assets.)

House prices need to come down to where folks can afford them. And prices may have to fall even further than we might have thought in the first place, because there’s going to be high level unemployment and probably not a lot of wage growth.

This is going to be a very unpleasant period, I’m sorry to say. The outcome we are witnessing is exactly why, during both the stock mania and the housing mania, I was so vociferous in my criticism of Greenspan. He is the one man who continually meddled with the market and continually advocated that folks behave in an irresponsible way.