It’s being overshadowed by the massive public rift among Republicans right now, but there is a debate underway inside the Democratic Party over how economically populist the party should be. Bill de Blasio’s big victory yesterday in New York, on a progressive economic platform, and the momentum among populist Democrats that is growing behind an expansion of Social Security, are signs of this broader trend.

But this is also being road-tested in policy terms, as the Obama administration takes tentative steps in the direction of more Wall Street accountability. JPMorgan is still reeling from the $9 billion Fail Whale fine. SAC Capital just paid a $1.2 billion fine for insider trading, and more importantly, pled guilty to the criminal conduct, which is a sharp break from scores of previous settlements where no wrongdoing was admitted. In response, anxious hedge funds are paying through the nose to make sure they’re, you know, not breaking the law.

This is a positive development not just for the sake of some long-overdue small scraps of justice, but also for the economic justice wing of the Democratic party. Until now, the administration has largely bent over backwards to cater to the needs of the financial sector, and programs to help normal homeowners, like HAMP, have been ignominious failures. But while the financial sector has lots of money, it is horrendously unpopular, and cutting it down to size could provide electoral benefits greater than could be had for Wall Street campaign cash.

But there’s still more to be done. This story from David Dayen ought to be raising the hackles on America’s financial cops, and the attention of congressional Democrats. Wall Street banks are starting up the great securitization machine, but this time on big bundles of rental income:

Over the past couple years, private equity firms and hedge funds have bought up over 200,000 single-family homes, mostly discounted foreclosed properties in communities wrecked by the housing crash, such as Phoenix, Atlanta, Tampa, Sacramento, Los Angeles and Riverside, California. They have spent billions to scoop up these vacant homes at fire-sale prices, renovate them, and rent them out, promising investors double-digit annual returns on the rental revenue. Private equity firms like Blackstone, which owns more than 40,000 single-family homes, think they can build an entirely new asset class out of this scheme, controlling the rental market for single-family homes…
Like mortgage-backed securities, the bonds would get sold in tranches, with the senior levels getting rental revenue first, and the junior tranches taking the rest. Rating agencies like Kroll, Morningstar and Moody’s have blessed the deal, presenting the senior tranches with a triple-A rating, essentially labeling it as perfectly safe for investors. 

The interesting thing about this plan is that it’s somewhat less inherently problematic than the old mortgage-backed security machine that sparked the 2008 financial crisis. Unlike home buying, renting is not subsidized to the gills, and renters tend to be lower-income, so the rent-backed security market will be much smaller than the mortgage-backed one. Therefore, any bubble thus created would at least be relatively small. There are other pitfalls to be sure, mainly centered around single fantastically wealthy organizations owning huge fractions of a region’s home stock, but it’s not quite financial crisis 2.0 yet.

In fact, in a sane world this might even be a positive development. Extant landlords can be greedy, unresponsive, and irresponsible about maintenance, especially in a hugely overheated rental market like DC or New York. A good dose of professionalization of the landowner and home construction/repair business would be a good thing.

But as Dayen notes, the primary reason to be suspicious of this plan is roughly the same reason you wouldn’t let a psychotic pyromaniac babysit your kids: the entire financial sector is utterly untrustworthy. It has proven itself time and time again to be not just concerned with profit and nothing else, but also riddled with criminality. If I had to guess, I’d say any Wall Street mass-rental scheme would likely skimp on maintenance, ignore their tenants, conspire to raise rents, and hollow out local tax bases by lobbying for lower taxes. Initial reports validate this suspicion.

So instead of waiting for the horror stories to trickle in, and then slapping down heavy fines afterward, federal regulators should preemptively start digging into this market, and Democrats should cheer them on. It’s a great chance for some Congressional testimony, and strong regulators should be appointed and confirmed with all speed wherever possible. Tim Geither’s “foam the runway” attitude didn’t even earn the favor of Wall Street, which has shifted to heavily favoring Republicans anyway.

So be strong, Democrats. There are more important things in politics than Wall Street’s favor. The fortunes of regular people is one of them.

Find me on Twitter: @ryanlcooper