I have had a somewhat up-and-down history with the folks in the Obama administration. I was proud to be their liaison to the progressive community during the Obama-Biden Presidential transition, and have labored mightily to help them at several key junctures during this first term. I have been quite critical of them at times on political strategy and specific policies, but have always supported them overall because I know Barack Obama is a far superior President to any of the extremist lunatics in the Republican Party: I definitely prefer a sane, intelligent President to any one of those turkeys. I have been especially appreciative of their outreach to me and other progressives since Rahm Emanuel left for Chicago, and have been thrilled with Obama's new found messaging toughness on jobs and taxing millionaires over the last couple of months. The administration’s messaging strategy, as well as a lot of key policy decisions, has been much stronger in the last couple of months, for which they deserve a large measure of credit. Knowing the stresses of working in the White House, I am impressed with the staff I know for their patience, hard work and dedication, and for being in politics for the right reasons, because I really do believe they are trying to make the world a better place.

But, boy, am I about to get on their bad side. It's not that I am taking any of the above back: I still very much want Obama to win re-election in 2012 against Mr. 1 Percent, Mitt Romney, or any of the other Republicans who might get the nomination. But I fear that without a major change of course, the administration is choosing a path which will be devastating both economically and for them politically in 2012. I figure my friends at the White House getting mad at me is well worth it if I can contribute to saving them from themselves.

This banking deal that I have been writing about for the last week was the subject of a great piece by Gretchen Morgenson in the New York Times, and as more details emerge, it looks even worse than a lot of us who have been following this issue thought it would be. We already knew that the $25 billion fund being created would only cover 5 percent of the underwater mortgage foreclosure problem, but Morgenson reports that most of the $25 billion isn't from the banks themselves, but from taxpayers. A dozen banks would contribute a grand total of $3.5 to $5 billion toward the settlement, pocket change for massive companies that apparently approved their foreclosure mill law firms likely committing over 1,000,000 counts of perjury in the robo-signing process. The rest of the money, about $20 billion, would come in the form of "credits" banks essentially give themselves if they agree to reduce a certain amount of the principal owed on mortgages. We don't know the details yet, but given that all banks in the home lending industry write down some mortgages, unless the details are tough on the banks (a phrase not generally heard of among regulators in this era), this will be giving banks credit for mortgages they would be writing down anyway. And if they don't end up writing down as much as they project, they probably won't end up being penalized for it given the history of programs like HAMP.

And in exchange for the pocket change penalty and agreeing to get credit for doing what they would have done anyway (which would be very big of them), banks would be given legal immunity for all those perjury counts and all the other fraudulent activity done through the MERS corporation — a shell corporation set up by the biggest banks to help them securitize all those mortgages into the financial products that caused the housing bubble and financial panic of 2008.

Now look, I have never been a single-issue person, and I live in DC and work in politics, so I see dirty sweetheart deals for wealthy and powerful special interests all the time. But the housing crisis is the elephant in the room, the most central short-term economic issue that makes everything else pale in comparison. Long term, there are a number of very important economic issues that will determine our nation's future, reviving the manufacturing sector, creating green jobs, and getting wages rising again so the middle class starts to prosper principal among them. But in the short run, if housing stays dead and more than a quarter of homeowners stay underwater in their mortgages, this economy will not start producing significant numbers of new jobs, because the housing problems are so big they will drown everything else out. And giving away so much of the legal leverage we have over these bankers without negotiating to force them to write down those underwater mortgages will guarantee us a dead economy for many years to come. Welcome to Japan’s Lost Decade, squared.

It would be bad enough for Obama to make this economic decision that will likely ensure jobs don't start picking up before next year's election. Even worse for him, though, is the deadliest, most toxic political situation this puts him in. In a front page article in the Washington Post on Oct. 14, it was reported that "President Obama and his team have decided to turn public anger at Wall Street into a central tenet of their re-election strategy." David Plouffe was quoted as saying "We intend to make it [being tough on Wall Street] one of the central elements of the campaign next year." And they are absolutely right to do so, as that kind of populist messaging against the most unpopular institution in America is exactly what the doctor ordered in these tough times. I have been advocating a tough-on-Wall Street message for the Obama White House ever since they took office, and couldn’t have been more pleased to see this emerge as a central strategy. But if the administration rams through this ultimate in Wall Street sweetheart deals — a laughably pocket change fine combined with “credit” for what they would have done anyway, at the expense for a get out of jail free card for 1 million counts of perjury and a wide range of other potential fraud — they will have zero credibility to run as the tough on Wall Street candidate. ZERO. And look, it won't be just me who will notice how bad this deal is — and I'm a ton more sympathetic to the President than many of the people who will. Reporters like Morgenson will keep blasting away. Economists like former IMF chief economist Simon Johnson and Nobel Prize winners Joseph Stiglitz and Paul Krugman will be outraged. The tens of thousands of people occupying cities all across America will turn on the White House. The millions who have signed online petitions on Wall Street issues will be devastated. Organizations that are usually Obama’s allies like labor and MoveOn.org will likely condemn the deal. And at the end of that entire outcry, they will have no credibility left to ever tell voters they are tough on Wall Street. According to exit polls last year, by a sizeable margin more voters blame Wall Street for our economic mess than blame either Obama or Bush, and they were swing voters — the kind of voters who broke for Obama in 2008 and Republicans in 2010. But those voters will have no reason to think Obama will be more on their side instead of on Wall Street's if he pushes this deal through.

This makes no sense. For example, for the Obama administration to be leaning so hard on California Attorney General Kamala Harris to sign off on this is truly politically suicidal, both for them and for her after she so strongly announced she was pulling out a couple of weeks ago. Yet they continue to push her. Why are they pushing so hard for this? It all boils down to Treasury Secretary Tim Geithner. It is apparent that Geithner believes the only thing that matters in terms of fixing the economy is to keep the big banks in good financial shape, which is ironic given that in public he claims that everything is fine with the banking sector now. Given the mistakes some of these big banks made in the housing bubble era, keeping some of them afloat has been a heavy lift, but Geithner is determined to keep these banks whole. If that means massive bailouts, that's the price we have to pay. If that means 10,000,000 foreclosures and 25 percent or more homeowners underwater, that's okay too. If it means slow-walking resolution authority for Citibank in spite of the President's orders to take it over and start to sell off its assets, okay. If it means continued 9 percent unemployment, it's what we have to do. And if it means waiving legal liability for 1 million counts of perjury and all kinds of other fraud, whatever.

The economics of this are just plain wrong: taking over a zombie bank like Bank of America rather than letting it bleed us dry, and forcing the writedown of underwater mortgages, would do far more for the real economy than keeping the big banks' profit machine humming. As Europe has just learned, there is nowhere near enough money to fix these problems unless the bankers are forced to start writing down debt. But economics aside, the politics are a walking nightmare. If the President loses the 2012 election, the architect of that result will not be Romney's leading strategist or Karl Rove with his secret slush fund but Geithner himself.

Here's the other thing: Geithner and others in the administration are just plain wrong when they say the administration can't do anything to, say, force mortgage writedowns. In the press briefing announcing the steps the administration was taking to make refinancing mortgages less costly, Gene Sperling was being asked why the administration wasn't taking bigger steps to deal with underwater mortgages, and he responded by saying this was the only thing they could get all the stakeholders, including the banks, to agree to. He was very clear that they didn't think they could do anything the banks didn't say yes to. But the big banks have violated so many laws, and have been so "creative" with their accounting, that there are all kinds of levers the administration has over them if they would only use them- or let the people who do want to use them like New York AG Eric Schneiderman and Delaware AG Beau Biden. One of the leading policy experts on this in the country, someone who has been deeply involved in all these issues for years, told me that if the President wanted to get the banks to do something on mortgage writedown, it would take a group of smart lawyers and accountants about five hours to figure out how to bring the banks to heel.

I have banged away on this topic with my old friends in the administration for a while, which is why I feel like I have no other choice to go public with this. But the cult of Geithner seems to reign supreme inside this administration. No matter how much damage Geithner’s policies will do to this President, the administration is still following his lead. Right now, the administration's best hope is that public outcry and courageous AGs bucking this deal will save them from themselves. Harris is a key player in all this because if big states like California stay out of the deal, along with New York and Delaware and a couple of other states, it probably can't go forward. Harris backed away from the deal a few weeks back, bringing joy to all those California activists who were working on the issue, but is being hammered by the administration and Wall Street to come back inside their tent. But nothing has changed on the deal, except that maybe it has gotten even worse. If Harris stays out, other AGs pull out, and other key players raise hell, it is a huge plus because if this deal falls apart, it would be the best political news this administration has had since the President started promoting his jobs bill and the millionaires' tax.

This is high-stakes drama, folks. Pay close attention to what happens next, because it may well determine the fate of both the American economy for the next 10 years and the 2012 election. Let's hope the Obama administration gets some sense on this issue, because by continuing on the path they are with this deal to once again bail out the banks from their own law breaking and incompetence, they are in danger of destroying all the good things they have done to shore themselves up politically these last couple of months. The political folks like Dave Plouffe need to understand the policy Tim Geithner is pushing is in direct contradiction with their political strategy of taking on Wall Street and will blow up badly in their faces. You can’t give the Wall Street guys the ultimate sweetheart deal, and then try to run against Wall Street, or run as fighting for the middle class. As my old boss Bill Clinton used to say, that dog just won’t hunt.