The report shows that big banks are providing billions of dollars in loans to fringe financial outfits; in turn, those fringe financial outfits are offering billions of dollars in loans to customers, often at usurious rates. Some payday lenders, for instance, offer short-term, roll-over cash advances with APRs of over 480 percent. The report argues the voluminous Wall Street financing means the payday business will keep expanding through the recession, as cash-strapped customers seek unconventional and sometimes dangerous banking products.

But, of course, we’ve known for decades that payday lending and other fringe financial services are big, big business, and the ties between that storefront cash checker and Wall Street are closer than you might think. (For the most in-depth examination of this phenomenon, see Gary Rivlin’s great Broke USA.) Many Main Street banks are actually competing with payday lenders now, offering their own versions of the same products.

What this really militates for is strong regulations set for the benefit of consumers, not created under the influence of lobbyists. To that end, the new Consumer Financial Protection Bureau — which maybe, just maybe, will get its leader in soon — should do a lot to constrain the industry’s worst practices.

Sens. Mary Landrieu (D-La., center) and Debbie Stabenow (D-Mich., right) are crafting a bill to increase lending to small businesses. (Pete Marovich/ZUMApress.com)

Bloomingdale — a pretty neighborhood in central Washington, D.C., with brightly painted Victorian townhouses and wide tree-lined streets — is gentrifying. Ten years ago, it had problems with gangs, robberies and drug-related violence. Today those issues are greatly reduced, thanks in large part to the efforts of the neighborhood’s tight-knit community of black families and young professionals. In the past five years, it has cleaned up its streets, developed two new parks and a small urban farm and watched its home values rise.

[Economy1] Now, residents of Bloomingdale — east of the U Street corridor, near Howard University — could use some businesses. There is Windows Market, which sells sandwiches and groceries; Big Bear, a popular coffee shop; and Timor Bodega, an organic grocer. But the closest place to grab brunch or a drink after work is a fifteen-minute walk away. “There’s just tremendous pent-up demand,” John Salatti, the neighborhood commissioner, says. “I couldn’t imagine how well a business would do if it could just open up.”

But the problem for Bloomingdale is that it just cannot get businesses to open up. It is not for a lack of trying. In the past year, at least half a dozen restaurants have attempted to set up shop in one of the neighborhood’s empty storefronts. There is the sandwich and pizza place attempting to move in next to the Howard dorm and the fancy new condo building. There is the neighborhood tavern trying to open near the yoga studio. There is the restaurant that wants to take over the old fire house. Not one has succeeded.

Consider, for instance, the case of Aleks Duni. He owns Veranda, a Greek restaurant in the Shaw neighborhood, as well as Heller’s Bakery and Marx Cafe in Mount Pleasant. The three small businesses together employ nearly 40 people and did well even during the worst of the recession. Duni set out to open a pizza restaurant on the main drag in Bloomingdale. He scouted out a location and secured the necessary permits, even getting a liquor license and thus a guarantee of good revenue. Now, no bank will lend him the $50,000 he needs to finish the job. “It is only a matter of getting the money,” Duni says. “If I did, I could be open in a month.”

Duni approached four banks about securing the loan to finish construction and open the doors. Each one said no. “There are a million reasons they give,” Duni says. “The first of them is that credit has been reduced.” Now, he says, he is concerned about continuing to apply for loans just to be denied. “If you apply and you don’t get the loan, your credit score goes down,” he notes. Frustrated, he has even sought the help of the Small Business Administration, the government agency. “They had nothing for me,” he says. “I don’t need to know what the loan requirements are. And the SBA cannot give me a loan.”

Duni is one of millions of frustrated small-business owners, who represent a lost opportunity for economic recovery and a major concern for the Obama administration. Over the past 15 years, two-thirds of the new jobs created in the United States were created by a small business. Small businesses, like big businesses, require loans to grow and hire new employees. But unlike their medium and large counterparts, small businesses are still hobbled by frozen credit markets. Lending remains on the wane despite the Obama administration throwing tens of millions of dollars at the problem. An  SBA initiative to back loans has worked, but only on a limited scale. Most Main Street banks continue to decrease funding to small businesses, allergic to the higher risks they pose.

Small businesses generally use commercial banks and finance companies for loans, and those lenders have continued to cut back their books even as the recession has started to lift. Commercial and industrial lending — the economic category that includes small-business loans — fell 20 percent in 2009 and declined a further four percent in the first three months of 2010. In January, the latest month for which data is available, nine big banks provided 28 percent less credit to small businesses than the month before, the Treasury Department reports.

A recent report by the National Federation of Independent Businesses, a small-business lobbying organization, underscores the point. The NFIB found that in 2009, 20 percent fewer businesses held a loan or credit line than in 2008. Just 40 percent of small-business owners that applied for a loan had “all of their credit needs met,” down from nearly 90 percent five years ago. The continued seizure of the credit markets is reducing small-business hiring and confidence, NFIB argues. Its index of small business optimism actually fell in March, with most businesses saying they had a gloomy outlook and did not feel it would be a good time to expand.

The underlying economic problem is twofold. First, banks claim that they do not have enough funds to lend to small businesses. Second, banks with funds are unwilling to take the risk of lending to small businesses, since they tend to default at higher rates. The Obama administration has tackled both problems with a spate of bills and initiatives. The two main ones include: a $730 million infusion of funding to the SBA, letting it increase government loan-backing to 90 percent and reduce fees, enacted last spring; and $17.5 billion in tax cuts, credits, and subsidies aimed in part at small businesses in the jobs bill passed last month.

These efforts have successfully boosted SBA lending back to pre-crisis levels. “Once the recovery act passed in February 2009, provisions went to the SBA to let us increase our guarantee immediately,” Hayley Matz of the SBA explains. “Since then, lending has increased 90 percent. We’re where we were. We’re at 2007 levels.” But the SBA is not a direct lender — and credit markets outside of the SBA’s control have remained frozen solid. “There is bipartisan support for SBA has done and acknowledgment that our recovery programs have been good,” Matz says. “The next step is not just to continue with what works.”

The administration is thus now pushing a stronger set of provisions to entice lenders to extend credit to small businesses in a bill currently being assembled under the watch of Sen. Debbie Stabenow (D-Mich.) and Sen. Mary Landrieu (D-La.), who heads the Senate Small Business Committee. The bill includes various tax breaks, including an exemption for earnings from small-business stock. But its centerpiece is a Treasury program to redirect $30 billion from the Troubled Asset Relief Program to community banks.

Still, small business advocates say it is too little, and too late. “We sure would have liked to have seen quicker action,” says Terry Gardner, policy director at the advocacy group Small Business Majority. “Like so many issues, these proposals are just bogged down. With the SBA loans, I had to ask — who is actually against this? Why is this still not moving? It has bipartisan and presidential support, plus support from banks and small business groups. It is frustrating.”

Moreover, he says that it is not clear if the administration plans will effectively convince banks to lend to small businesses. “The Treasury proposal providing more capital to community banks is only a good idea if it actually induces them to make loans,” Gardner says. “There has to be some incentive structure that guarantees that taxpayer money being loaned to these banks is accomplishing its purpose — to get more capital to small businesses to create jobs — because efforts to do that have stalled.”

Barney Frank, chairman of the House Finance Committee. (WDCpix)

Mortgage servicers have not done enough to help struggling homeowners avoid foreclosure, a leading Democrat said Wednesday, and Congress must now step in with new legislation to help them salvage their troubled loans.

“We have not seen servicers participating in any significant way,” Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said during a panel hearing on the foreclosure crisis. “I believe we now have a situation that requires legislation.”

Frank’s call comes on the heels of news that some of the nation’s largest mortgage lenders — including Fannie Mae, Freddie Mac and several large banks — are streamlining programs to modify loans to strapped borrowers.

Illustration by: Matt Mahurin

Frank applauded these institutions for their “constructive steps.” But the powerful lawmaker did not similarly compliment servicers, companies that buy from lenders the rights to manage mortgages. The result has been that more folks are losing their homes.

“We are getting some progress where the legal authority to modify is clear,” Frank said. “We have not had that where there are servicers.”

The congressman’s comments come as Washington’s economic bailout strategy shifts from Wall Street to Main Street. Experts have long contended that the sinking housing market — and skyrocketing foreclosures — are at the core of the financial turmoil. Still, even as lawmakers have pumped more than $1 trillion into the nation’s financial institutions and insurance companies, they have largely ignored struggling homeowners and consumers. That approach, policy-makers are beginning to acknowledge, treats only the symptoms.

Treasury Sec. Henry M. Paulson Jr. revealed Wednesday that the remaining half of the $700 billion allocated for the bailout of the financial system would be spent largely on easing consumer credit markets. The move would make it easier for consumers to finance car purchases, get student loans and obtain credit cards, he said.

“This market is currently in distress,” Paulson said. “Costs of funding have skyrocketed, and new issue activity has come to a halt.”

The first $250 billion of the bailout went to recapitalize financial institutions. In exchange, the government took equity stakes. The idea was to bolster their balance sheets, which have been pummeled by big investments in toxic mortgage-backed securities. But with thousands of Americans continuing to lose their homes to foreclosure, many lawmakers and housing advocates say the trickle-down strategy of helping homeowners by funding banks has not worked.

Testifying before Frank’s panel Wednesday, finance-industry representatives emphasized that servicers are beholden to investors, not homeowners. That argument didn’t sit well with the financial services chairman. “The servicers have the power to [modify loans],” Frank said, “but we get every indication, anecdotally and statistically, that it is not being done.”

“Servicers do have the legal authority, right and responsibility to modify loans,” said Thomas Deutsch, deputy executive director of the American Securitization Forum, a trade group. But those decisions “must also be in line with the contractual rights and commercial expectations of institutional investors, such as pension funds and mutual funds.”

Michael Gross, managing director of Bank of America’s loan administration loss mitigation, agreed. “Servicers are contractually obligated to choose the home-retention or loss-mitigation option which provides the best return to the investor,” Gross said. “That is a contractual obligation.”

Writing in The New York Times yesterday, the business analyst Joe Nocera summarized this tension between loan owners, servicers and borrowers:

The situation borders on the absurd. Investors will not allow mortgage modifications that would hurt them more than some other investors — thereby insuring that everyone gets hurt even more as foreclosures continue. And as foreclosures continue, the financial crisis continues to deepen because foreclosures on Main Street mean billion-dollar write-offs on Wall Street. And struggling homeowners can only pray that their mortgage is still held by the bank and not sold to Wall Street — in which case they are out of luck. It is like flipping a coin to see if you can hold onto your home.

Faced with this reality, Frank said Congress has to intervene to help people stay in their homes. The “appropriate” role of the federal government, Frank said, is “to induce those who hold the loans to recognize that they are holding loans that are not going to be repaid in full, to calculate that in many cases this would be a worse economic problem if they foreclosed, and to write down the terms of the loan, either by interest or principal or some combination, to a point where that borrower could repay.”

Treasury Secretary Henry Paulson (WDCpix)

His suggestion raised immediate concerns among panel Republicans, who are wary of more government intrusion into private markets. “I am all for encouraging the parties to work together, if they’re willing,” said Alabama Rep. Spencer Bachus, the highest-ranking Republican on the Financial Services Committee. “[But] I’m very hesitant to try to force the parties to an agreement.”

Several programs to modify troubled mortgages are already up and running. The Hope for Homeowners initiative, for example, which launched Oct. 1, puts qualified borrowers into new, 30-year fixed-rate mortgages. But for lenders, it’s a voluntary program — and not a popular one. According to Rep. Steven LaTourette (R-Ohio), only 42 loans have been submitted under the program for modification, and none have been accepted. “All I can say is, what a mess this is,” LaTourette said.

Meanwhile, foreclosure filings for the third quarter topped 765,000, up 71 percent from a year ago, according to RealtyTrac, an online foreclosure database. The situation is likely to worsen. As TWI’s Mary Kane pointed out last week, the subprime crisis is just three-quarters through, and defaults on Alt-A, or “liar”, loans won’t hit a peak until next year.

Yesterday, Freddie Mac, Fannie Mae and other major lenders announced that they will begin streamlining their loan modification processes for borrowers who are either in foreclosure or at least 90 days late on their mortgage payments.

Some lawmakers cheered the announcement. Yet there remains the fear that even those programs could fall short of addressing the immensity of the problem. Rep. Carolyn Maloney (D-N.Y.) called the Freddie and Fannie effort “timid and tiny,” saying it will help only a fraction of homeowners in need.

“We need to be thinking in an order of a magnitude that is much bigger,” Maloney said. “Not hundreds of thousands, but millions.”

They’re actually thinking of curbing some of those rewards, The Wall Street Journal reports today.

From the Journal:

“To the guy in Kansas making 60 grand a year and losing his house, it seems like madness to bail out firms at a favorable interest rate and see them have thousands of people making millions of dollars a year — and it is madness,” said Alan Johnson, a New York compensation consultant.

So Wall Street may take a few steps to stop the madness. But let’s call them what they are — baby steps. The idea is to make sure bonuses for chief executive officers decline sharply. But lower-level traders and investment bankers, who could be plucked away by other firms, still will see generous bonuses.

I assume that means even if those employees played a big role in the fostering the subprime housing bubble, they’ll still get bonuses, because other firms would want their obviously invaluable services.

The Journal notes that Wall Street isn’t really going to give up without a fight:

The wide-ranging pay talks follow demands for information about compensation plans. Some firms have considered hiring one outside law firm to represent the nine companies on the Treasury Department’s initial list of capital recipients in their response to this week’s demands by New York Attorney General Andrew Cuomo. Top traders, who can out-earn CEOs in a good year, are concerned about possible disclosure of their names and pay.

There’s a lesson in here somewhere. I’m just not sure exactly what it is.

Flickr: Dennis Gerbeckx

In perhaps the greatest financial paroxysm yet, a spate of gigantic mergers sparked by the recent global crisis has overnight reordered the American economic landscape — if not America itself.

Once almighty Wall Street is being forced by its nosediving fortunes into a shotgun marriage with Main Street — relying on Midwestern hardware stores, the savings accounts of little old ladies in Dubuque, California tanning spas and thousands of other small-time institutions nationwide to refill its empty coffers and provide new leadership. The Street’s current leaders will be retrained as grocery baggers, parking valets and other jobs not involved in handling money.

A symbolic condition of Wall Street’s self-dissolution is that everybody on Main Street will receive an unearned Wall Street-style bonus of $24 million, a giveaway meant to be as senseless as every other Wall Street bonus payout of recent years — but with the beneficiaries and the losers reversed.

It will also be compensation for the economic consequence of this and other recent financial moves: nobody except Treasury Sec. Henry Paulson Jr. will have a job.

Meanwhile, General Motors’ merger with Freddie Mac, while it might appear to be — and in fact is — a union of the halt with the blind, is anticipated to be a win-win situation. The complexity of the merger will indefinitely prevent GM from building vehicles nobody wants. At the same time, Freddie Mac will be distracted from conjuring further fiscal mischief.

Chrysler’s merger with bankruptcy administers euthanasia to a patient that has been begging for it ever since being left by Daimler-Benz AG on the doorstep of Cerberus Capital Management with a note and no forwarding address.

Bruce McCall, a humorist, is a regular contributor to The New Yorker and Vanity Fair. He is the author of “All Meat Looks Like South America: The World of Bruce McCall” and “Zany Afternoons.”

Flickr: entobox

Three sound-bites led to the passage of the biggest bailout in world history. The first was that the bailout is “not just for the fat cats” on Wall Street. This, in turn, is because in this crisis “Wall Street and Main Street are joined at the hip.” Finally, anybody who challenges this is told that he/she “just doesn’t get it.” The bottom line is that if taxpayers did not acquiesce and support the trillion-dollar-plus rescue plan, and the bill failed to pass, really bad things would happen to Main Street.

Isn’t it odd that Wall Street and Main Street are never joined at the hip when Main Street is foundering? In such times “market discipline” and moral hazard are the watchwords. But the moment Wall Street firms’ balance sheets begin to falter, the relationship between Wall Street and Main Street magically transforms itself from parasitic to symbiotic.

Illustration by: Matt Mahurin

A careful look at the $700-billion Troubled Assets Relief Program, or TARP, suggests the interests of Wall Street and Main Street are really not aligned in this bill. It seems clear that the bailout plan will do little to help Main Street. Any benefits will be marginal and indirect. On the other hand, TARP will help Wall Street firms — and it will help it a lot.

Toxic derivatives, particularly collateralized debt obligations, or CDOs, and credit default swaps dominate the balance sheets of Wall Street firms. Most regional and community banks’ balance sheets are largely free of these troubled mortgage assets. Thus bailout won’t do any good for these Main Street banks. It will just help their far riskier, far bigger Wall Street rivals.

The core feature of TARP is that it gives the Treasury Dept. hundreds of billions of dollars in U.S. taxpayer funds to buy bad mortgage assets from the (mainly) Wall Street firms that bet on these highly risky, and now deeply troubled, assets. But, of course, the statute does not require Wall Street firms to sell assets to the government. They only agree to sell them if the price is right.

This means that if the Treasury is actually going to buy any assets, as it surely will, the price paid for these assets inevitably will be above both the market value and the book value of these assets — otherwise no bank would unload them.

It is easy to explain why. If the price offered by the Treasury is not above market value, then no bank would sell to the Treasury: it would sell the asset into the market at the higher market price instead. If the price the Treasury is willing to pay is not above the value recorded for that asset on the selling bank’s books, then the bank is better off holding onto the asset — since selling would force the bank to recognize a loss and cause an immediate reduction in the bank’s capital equal to the difference between the book value and the (lower) price paid by the Treasury.

Imagine, as is probably the case, that whoever acquires Wachovia acquires a large number of questionable “pick- a-pay” mortgages that have a real economic value of only $10 billion, but were once considered to be worth $20 billion. Pick-a-pay mortgages, otherwise known as negative amortization loans, feature a low minimum payment — usually 1 percent — and give the borrower the option to make interest-only payments, at least for a while.

Borrowers with such loans usually make only the trivial minimum payment due each month rather than the actual interest rate. This serves only to delay the time when the borrower must pay the actual interest owed.

The unpaid interest quickly accumulates. When the amount of principal and deferred interest hits, say, 110 percent of the original loan balance. the minimum payment option disappears, and the loan resets with a new minimum payment that will be substantially higher.

Under TARP, U.S. taxpayers or, according to Wall Street, the Treasury Dept. would pay, say $15 billion for these mortgages at Wachovia. This would mean a gain of $5 billion. It would go directly to the bottom line — i.e. to the shareholders of Wells Fargo or Citigroup or whoever buys Wachovia.

The acquirer will immediately be financially stronger, show improved earnings and have $15 billion in new cash before taxes. No wonder Wachovia suddenly looks like such a fantastic target.

To sweeten the pot even more, the Treasury has thrown in some additional tax breaks. Specifically, new interest in Wachovia may have been sparked by an IRS notice issued last Tuesday that increases the tax deductions that can be taken by acquirers to off-set Wachovia’s loan losses.

The notice would remove the current strict limits on the deductions an acquirer could make for the loan losses and bad debt deductions that Wachovia sustains following the acquisition. Some experts have estimated that for certain borrowers, including Wells Fargo, the entire cost of acquiring Wachovia could be offset with the tax savings from this rule change.

The $700-billion dollar question is what Citigroup, Morgan Stanley and the other Wall Street firms who get cash in the bailout will do with the money they get for selling toxic mortgage-backed securities to the Treasury. It is by no means certain that the firms will use their new-found hundreds of billions to make new mortgage loans or otherwise plow the money back into Main Street.

After taking huge losses on their portfolios, these Wall Street firms are likely to be far more restrictive in their future lending practices. As taxpayers funding the bailout, we are delighted by the banks’ newly found risk-aversion. Borrowers on Main Street will not benefit from the cash hoarding that is the newest Wall Street fad.

Regardless of what Wall Street firms do with the money they receive, it goes directly to the bottom line of the Wall Street firms. Main Street has to take it on blind faith that Wall Street will share some of the Treasury’s largess with them. Wall Street is known for a lot of things — sharing is not one of them.

It is highly doubtful, then, that much, if any, of this money will actually trickle down to Main Street. Even in the highly unlikely event that the Treasury plan jump-starts a nascent market for the toxic paper held by Wall Street, there is no reason to believe that the money generated by this new market will find its way from Wall Street to Main Street.

Bonus time is approaching on Wall Street. Inevitably, some, if not most of the $700-billion early Christmas gift from Nancy Pelosi and Hank Paulson Jr. will find its way into the pockets of investment bankers, saving Wall Street, but not Main Street, from one of its worst years in history.

Jim Holdcroft is a partner in the private-equity firm, Landmark Partners. Jonathan Macey is the Sam Harris Professor of Corporate Law, Corporate Finance & Securities Law at Yale Law School and author of a new book “Corporate Governance: Promises Made, Promises Broken.”

UPDATE: Jonathan Macey appeared on the ABC News show 20/20 on Friday night and had this to say about the economic crisis:

It could take "generations, rather than decades," for cities like Cleveland to recover from the current housing crisis. (Flickr: T-FIZ)

For people facing foreclosure — and for the housing and community development groups trying to help them — there’s been little to cheer about lately.

The $700-billion bailout bill approved last week offers little or nothing to homeowners in trouble. A measure to change federal law to allow bankruptcy judges to modify mortgage loans didn’t make it in the final version. Nor did a proposal to set aside for affordable housing some 20 percent of future profits from the sale of toxic mortgage-backed securities. (Republicans feared the money would go to ACORN, a community group the GOP links to voter fraud.)

As foreclosures mount, the bill’s provision calling for more loan modifications will have only a modest effect, considering that subprime mortgages have been sliced into pieces and sold to investors around the globe. Add to the insult, the debate over the bill reignited old charges that the Community Reinvestment Act, an anti-redlining law, caused the mortgage crisis, and that poor and minority borrowers are to blame.

Illustration by: Matt Mahurin

It doesn’t get any better from there. The credit crisis is likely to make it even tougher, if not impossible, for homeowners to refinance their loans — even those who aren’t already underwater on their mortgages.

With all that government money dedicated to the bailout, meanwhile, there won’t be much left over to put toward rebuilding neighborhoods or creating affordable rentals. Cities and towns that used revenues from real-estate transactions to fund housing development won’t have that kind of money to spend anymore, given the collapse of the housing market.

Amid the rubble, some supporters are trying to remain hopeful that things will get better; that government and housing counseling groups might find creative ways to come up with solutions to modifying loans or reusing foreclosed properties. That’s for later. For now, there’s just the shell-shocked feeling that comes with facing an uphill battle that just got a lot steeper.

“The landscape looks like the Roman Empire after being attacked by Attila the Hun,” said Alan Mallach, a senior fellow at the National Housing Institute and former visiting scholar at the Federal Reserve of Philadelphia, referring to the outlook for helping homeowners and rebuilding neighborhoods. “It’s really bad out there.”

When the mortgage crisis began in 2007, the economy was still in pretty good shape, Mallach noted. Now, the foreclosure rate is worsening as the economy weakens, meaning homeowners and their advocates will face even more difficulties going forward. “We’ve got a double whammy here,” Mallach said. “The economic crisis has taken on a life of its own. The big question: Is how much worse is it going to get? Who knows where this is going.”

It’s tougher in some places than others. In Cleveland, Kermit Lind, a Cleveland State University law professor, considers the bailout as something crafted for housing markets on the coasts and in Nevada, with little thought given to the problems of Midwestern cities that have declining home values and populations. “The fallout from the bailout,” Lind said, “will be as bad or worse than the mortgage crisis itself.”

Cities with a significant amount of abandoned and foreclosed properties, like Cleveland and Buffalo, had been making progress in holding banks accountable for their empty houses by hauling them into municipal housing courts and fining them. In this way, cities could recover at least some of the costs of cutting the grass, boarding up the homes and other maintenance.

They could even try to bill banks for the costs of demolishing deteriorated properties. Banks and servicers often pointed fingers at each other over responsibility for the properties. But faced with fines, they paid up. Now, with the government buying up millions of mortgage-backed securities and taking control of Fannie Mae and Freddie Mac, it will be harder than ever to determine who should be held accountable for foreclosed properties.

Secretary of the Treasury Henry Paulson (WDCpix)

Just because the government is purchasing the securities won’t mean it will own or control enough of them to make decisions on all 2the mortgages — something credit experts call the “Humpty Dumpty” problem. They can’t put the mortgages back together again, and even if they could, many homeowners have second mortgages that would also need to be refinanced.

That could mean the government ends up in charge of the properties, without being able to renegotiate the loans. Since federal laws preempt state laws, Lind said, it’s unlikely the city can haul the government into court. Cities already facing declining property tax revenues will face even more costs to either keep up foreclosed homes or tear them down.

To Lind of Cleveland State University, it means a huge exacerbation of the already troublesome problem of toxic titles, in which banks fail to follow through on foreclosing on worthless properties, and their ownership remains in limbo. Vandals target the vacant houses, and entire blocks and neighborhoods decline. Lind doesn’t hold out much faith in the government doing a better job, pointing to the U.S. Dept. of Housing and Urban Development’s notorious reputation as the nation’s largest slumlord, for it ignores so many of its properties.

It took Cleveland decades to recover from HUD and Federal Housing Administration housing scandals in the 1970s. This time around, said Lind, “we’re talking about generations, rather than decades, to recover.”

The question of whether the government will be any better at loan modifications than the private sector remains to be seen. In an encouraging sign, Bank of America, which bought the troubled subprime lender Countrywide Financial Corp., announced Monday a $3.5 billion plan to renegotiate high-rate mortgages for 400,000 Countrywide borrowers. But it’s still unclear how well the plan might work, and how many borrowers and servicers will participate.

In the presidential debate Tuesday night, Sen. John McCain, the Republican nominee, called for the Treasury Dept. to buy up bad mortgages and renegotiate them. But buying the mortgages directly still won’t get around the problem of modifying securities sliced into pieces and scattered among many investors. In addition, only borrowers who were creditworthy when they took out their loans will qualify — which may eliminate millions of people who took out subprime loans with no downpayments.

It’s also an unknown whether cities would have some legal say in the government’s handling of foreclosed properties in their jurisdictions. Cities like Cleveland have been trying to establish land banks to buy vacant land and abandoned homes, which might give them more control over those properties and some leverage to negotiate with the government. But a land bank requires legislative approval, which has become a lengthy process, Lind said.

Still, with all the gloom and doom, housing groups are already considering how to begin again, pushing for new strategies to help homeowners and communities.

If Bank of America follows through with the loan modifications, “it would begin to break a huge logjam,” said Ellen Seidman, who studies the financial-services industry at the New America Foundation. It would set an example for other lenders — and for the government. “But I’d hold off on getting excited about the serviced loans,” Seidman said, “until we see something starting to happen.”

On another front, if Congress returns after the election with a large Democratic majority, it most likely would move forward with some sort of mortgage rescue bill that would more actively prevent foreclosures, she said.

Given the magnitude of the mortgage crisis and the credit crunch, it’s possible that the government may be more open to new ideas — and prove more effective — in handling loan modifications and foreclosures than people now might assume. Consider that the federal government’s solutions to past crises, from the Resolution Trust Corp. during the savings and loan debacle to the Home Owners’ Loan Corp. during the Great Depression, were considered great successes, Seidman noted.

The government, for example, could offer incentives, or even sanctions, to servicers to prod them to modify loans. Some servicers have been willing to deal, while others have rejected any overtures. Under the bailout bill, the Treasury Dept. can buy up second mortgages, which may ease the way for more loan restructurings.

As the federal government has scrambled for solutions, the states are moving forward. Mallach, of the National Housing Institute, testified this week on behalf of a proposed New Jersey law that would allow former homeowners to remain in their homes as tenants after foreclosure, until the house is actually sold to someone who intends to use and occupy it.

In most cases, delinquent homeowners have been automatically evicted following a sheriff’s sale, leaving a house vacant for months or even a year or more, until a new owner does something with it. During that time, houses are often vandalized and left in disrepair.

In Philadelphia, Sheriff John Green adopted a policy to hold off on foreclosures until both sides go into mediation. So far, that mediation is resulting in fewer foreclosures, Mallach said. Many borrowers go into foreclosure because they can’t, or won’t, communicate with their servicers. Mediation puts them face to face to work something out.

Just recently, HUD began releasing money to communities from the nearly $4 billion set aside in the mortgage rescue bill passed over the summer to help communities acquire and fix up foreclosed properties. The money isn’t nearly enough to tackle all the foreclosures facing cities, but if it’s handled well and targeted to specific neighborhoods, it could make a big difference, Mallach said.

That money represented a big win for housing groups, noted Robert Zdenek, a board member of the National Housing Institute and a community-development consultant. But with the credit crunch and 6.5 million foreclosures expected in the next few years, “it feels like we’re putting out a brush fire with a wildfire coming up right behind it.”

That housing groups didn’t get what they wanted for homeowners isn’t surprising, he and others said. They’re a loose coalition of grass-roots organizations, ranging from some that handle sophisticated financial deals and others that provide one-on-one counseling. In a lopsided mismatch, they were up against the powerful and well-funded financial services industry.

During the bailout debate, The Wall Street Journal described one financial services lobbyist typing on his BlackBerry at a Washington Redskins game, following the bill’s progress on the Hill.

The shame of it all is that, during the 1990s, housing and community-development groups grew in sophistication and made their mark in neighborhoods. Cities like Newark began to have a comeback, Zdenek said. It’s worrisome to think of going backward.

But at a time when the groups would like to be working on loan modifications or finding new money to help homeowners, they’re pulled in many other directions. This week, for example, the National Community Reinvestment Coalition had to spend its time and energy organizing yet another press conference to refute the belief that the Community Reinvestment Act caused the housing crisis.

Main Street in Teague, TX (Flickr: cmaccubbin)

Late last month, as Congress was on its way to passing the $700-billion Wall Street bailout plan, another economic stimulus measure died a quiet death in the Senate.

That $58-billion proposal would have extended unemployment benefits, pumped billions of dollars into local infrastructure projects and increased funding for low-income nutrition and health-care programs. In other words, rather than bailing out Wall Street, this bill helped Main Street.

It didn’t survive long. Just hours after the legislation passed the House, Republicans killed it in the Senate. Now, many economists, health-care advocates and low-income advocacy groups say, while the larger bailout was probably needed to address frozen credit markets, it will do little to ease the immediate pinch on the country’s most vulnerable folks. That hole, which the stimulus plan would have helped to plug, remains.

Illustration by: Matt Mahurin

“Bailing out Wall Street’s bad debts when millions more Americans can’t pay their bills is like bailing out a rowboat springing more leaks while the ocean is rising,” Robert B. Reich, former Labor secretary under President Bill Clinton and now professor of public policy at the University of California, Berkeley, wrote last month for Talking Points Memo. “Unless Americans on Main Street have more money in their pockets, Wall Street’s bad debts will continue to rise.” Reich called for an extension in unemployment benefits and the passage of a stimulus bill to create jobs.

Congress, however, has made clear where its priorities rest. Despite its approval of the $700-billion Wall Street bailout — combined with an additional $110 billion in unpaid tax benefits — many members claimed the $58-billion Main Street stimulus was just too expensive. The Bush administration echoed that sentiment, vowing to veto the bill.

Nearly 20 years after President Ronald Reagan left office, trickle-down economics — the theory that further enriching the wealthiest folks in the country will (eventually) save us all — won the day.

It wasn’t the only example in recent weeks. Late last month, Congress passed another industry bailout, offering $25 billion in federal loans to the nation’s ailing automakers. The loans almost exclusively benefit the Big Three — Ford, General Motors and Chrysler — who have lost the farm betting on gas-slurping SUVs. Ostensibly, the funding will help the automakers develop more fuel-efficient engines, but it remains up to the Energy Dept. to set those requirements.

Michigan’s congressional delegation has been quick to claim that the funding is necessary to protect local jobs. “This isn’t a bailout,” Sen. Debbie Stabenow (D-Mich.) told Fox News last month. “We’ve been working on this for some time. The timing on this is very unfortunate.”

But some environmentalists disagree, arguing that there should be some benefit to the taxpayer for bailing out the industry. Daniel Becker, a former Sierra Club official who is now director of the Safe Climate Campaign, offered one suggestion: force the beneficiaries to increase their fuel efficiency standards to 40 miles-per-gallon by 2015. “We shouldn’t be doing this,” Becker said, “unless they’re going to change their ways.”

Perhaps the trends aren’t surprising, the catering to automakers above environmentalists; the bailing out of investment banks instead of troubled homeowners. In terms of lobbying dollars, the industries, after all, hold an enormous advantage.

If Americans have learned no other lesson in recent weeks, at least we now know that our individual financial health hinges directly on that of a few big banks in New York — a reality clarified by Federal Reserve Chairman Ben Bernanke as he testified before Congress last month.

“People are saying, ‘Wall Street — what has that got to do with me?’” Bernanke said. “Unfortunately, it has a lot to do with them. It will affect their company. It will affect their job. It will affect their economy that affects their own lives, affects their ability to borrow and to save and to save for retirement and so on.”

As if on cue, the Congressional Budget Office estimated Tuesday that Americans have lost $2 trillion in retirement savings in the past 15 months.

Still, many observers point to the importance of having an economic stimulus bill — a second stimulus bill, for the first has come and gone — on top of the Wall Street bailout. The House-passed proposal would increase funding for homeless kids, food stamps and state Medicaid programs — the very programs that get squeezed in difficult financial times.

Budget hawks argue that the country can little afford adding to deficits. “At some point we have to put the some breaks on the Treasury,” said Steve Ellis, vice president of Taxpayers for Common Sense, a budget watchdog group.

Jagadeesh Gokhale, an economist at the libertarian Cato Institute, agreed, arguing that spending increases showered on social programs during recessions almost never revert to lower levels during booms. “If we pass a liberalization of the enrollment rules today,” Gokhale said, “they will become entrenched.”

Yet without the stimulus, some advocates say, the costs would be even steeper. “States will begin very serious discussions about cutting health care,” said Bruce Lesley, president of First Focus, a child-welfare group. “The uninsured rate could skyrocket.”

On Tuesday, the Center on Budget and Policy Priorities, or CBPP, a liberal policy analysis group, issued a report revealing that the weak economy — not the credit crunch — remains the most significant obstacle as states struggle to provide basic services under ever-tightening budgets. Increases in joblessness lead not only to the heightened need for public services, the report points out, but also to decreased revenues. The squeeze comes from both sides.

The Wall Street bailout, said Chad Stone, chief economist at CBPP, “in no way obviates the need for fiscal stimulus. They should have done both.”

There might yet be time. The Senate is scheduled to return to Washington on Nov. 17, leaving one last opportunity to tackle the House-passed stimulus bill this year.

They found 70 towns and cities from Connecticut to California where Wall Street and Main Street actually meet. They interviewed the denizens of this metaphorically powerful intersection about their take on the economic crisis and the bailout. Here‘s what they found.

I guess lenders who sold deceptive loans on unfair terms, packed on prepayment penalties to hold back borrowers who tried to refinance into better loans and offered brokers kickbacks for bringing in loans at higher rates than borrowers qualified for are totally innocent. Oh, and all those lenders that targeted poor and minority neighborhoods with high-cost loans – can’t blame them either.

Meantime, Economistmom weighs in to say that she’s glad Democratic vice presidential nominee Joe Biden slapped down the idea that soccer moms alone have special insights into the economic troubles of average Americans. Biden responded to Palin’s comments along these lines by emotionally recalling his experience as a single dad, after his wife died.

Given the fact that the country is on a financial precipice, facing the worst economic crisis since the Great Depression, maybe we should just assume candidates have a pretty clear idea that times aren’t good. Let’s just cut all those kitchen-table references from here on  – please.

Palin, for example, began the debate by saying you can get a sense of how people feel about  the economy’s troubles by going to a soccer game and talking to parents on the sidelines. As someone who has been going to games all fall and has two tomorrow, I think I speak for many a parent when I say: No, please don’t ask. We’re trying to watch the kids play.

I don’t care whether a candidate shops at Home Depot or frequents Main Street in Wasilla. Our economy is in big trouble – can someone explain exactly how we got here, and how we’re going to get out of it?

Could the candidates talk about why banks are fearful of lending to one another and what tools government can and should use to ease a credit crunch?

Could we end the faux folksiness on both sides and get down to business, sorting out the lessons learned from the housing bubble and how we’ll prevent similar problems going forward? How do we regulate the financial services industry without making credit too restrictive? Is the bailout bill the best strategy or should we should be looking at some alternatives?

And what about what’s ahead, the sacrifices we’ll need to make, the difficulties we’ll face in a stagnant economy?

Judging by the debate, candidates want to score points by relating to Joe Six-Pack. If they really mean it, they could talk in substantive ways about the financial crisis and what they’re going to do about it. Anything less reverts to platitudes and condescension, something the folks on Main Street in small- town America can figure out for themselves.