I agree about calling CPS, but maybe first try talking to them (both of you and both of them) about your concerns re: the baby's safety. Maybe they haven't thought about that?? It's hard to imagine that they haven't, but then it's hard to imagine that they'd even consider doing this. Anyway, if they don't change things after that, then call CPS. I just don't think it's safe or humane what they're doing (even by CPS-type standards). For one thing, if the basement isn't finished, then it's not fit for habitation, most likely. For another, if they can't hear the baby, then they don't know if something major happens (of course, in my mind, anything a baby cries about should be taken seriously, but I'm talking more about the things that have been mentioned, like vomiting, etc.). That is not safe, by anyone's standards.
And here I was feeling sorry for the baby I saw yesterday at a birthday party. He was bottle-fed, and the only time I saw his mom hold him was to feed him. Otherwise he was in his stroller or a friend (9 mos. pg, and with a child of her own -- prolly felt sorry for him) was holding him. Who knows what his home life is like, but what I saw is nothing compared to what you describe.