The political world’s atwitter speculating about what the Democratic debacle in Massachusetts will mean for health insurance reform. But the rapidly diminishing fortunes of the Senate Democrats are already evident in a quieter, yet equally consequential policy debate: Whether—and how—Washington will ensure that Joe the Consumer gets a fair shake from the big banks.

The Dems’ point person on that question is veteran Sen. Chris Dodd from Connecticut, who chairs the Senate Banking Committee. Yes, that’s the same former presidential hopeful who has chosen retirement rather than face certain defeat in November. So perhaps it’s no surprise that Dodd, once bullish on the subject of financial reform, appears to have downsized his ambitions on this question, too.

The political centerpiece of President Obama’s financial reform package is a new agency dubbed the Consumer Financial Protection Agency. Once upon a time, it had no more spirited defender than Dodd. Responding to the banking lobby’s objection to the idea back in June 2009, he railed, “The very people who created the damn mess are the ones now arguing that consumers ought not to be protected.”

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By last week, though, Dodd’s tone had changed. Actually, he’d gone mum, but multiple press reports revealed that he is now working on a deal with the Banking Committee’s ranking Republican, Alabama Sen. Richard Shelby—a deal that would drastically water down the proposal in order to win GOP support for broader financial reforms. This, of course, won’t work—making it bad politics that will result in worse public policy. But that’s the Democratic way these days.

The GOP is just as eager to bog the White House down with fixing Wall Street as they were with remaking health insurance. Republican leadership long ago publicly swore off supporting any part of Obama’s agenda, so why start now? Why hand the Democrats a popular, easily understandable victory against the banks to campaign upon? As the Washington Post’s Ezra Klein put it, consumer protection is “the public option of financial reform.”

But while it may be redundant to say so, Dodd’s pending back-room deal is yet another capitulation that America really can’t afford. And it’s one that will leave black America particularly vulnerable.

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The American Bankers Association has argued that a new agency to protect consumers is both unnecessary and confusing. The industry lobby group notes that existing bank regulators already count consumer protection as part of their missions. Separating the job into a stand-alone agency, lobbyists say, would set up bureaucratic turf wars with banks trapped in the middle. So Dodd and Shelby are reportedly negotiating a deal in which one of the existing regulators would beef up its consumer-protection arm, and Obama’s independent agency would be scrapped.

If that happens, you can forget about any real change. Think about it: Bank regulators have clearly struggled with just their primary mission of keeping the financial sector from going over a cliff. Never mind their secondary, wedged-in responsibility to protect consumers. Pat Garofalo in Think Progress’ Wonk Room puts it well:

<blockquote>We already have plenty of examples showing how consumers are forgotten by regulators with divided mandates. After all, the Federal Reserve was given consumer protection powers in 1994 that it simply never exercised. The Office of Thrift Supervision and the Office of the Comptroller of the Currency both have consumer protection responsibilities as well, but neither can credibly claim to have stopped banks from running roughshod over consumers.</blockquote>

Part of the problem is that the conflict the American Bankers Association fears—between protecting consumers and keeping banks solvent—already exists. A regulator charged with minding the safety and soundness of the financial sector may, for instance, see nothing wrong with gouging credit card customers if it helps keep a bank on firm financial footing. And as we’ve all painfully learned, consumers have neither the time nor the resources to stay informed about complex financial instruments that, by design, sound like way better deals than they actually are. We need a watchdog to keep up with this stuff on our behalf.

The Government Accountability Office offered further proof of that plain fact in a study last month. GAO looked at all subprime loans made between 2000 and 2007 and found a whopping 27 percent failure rate. “The harm caused by subprime mortgage lending considerably outweighed any benefits it provided,” blogged Alan White, one of the nation’s leading researchers on foreclosure. “It is hard to imagine now what benefits could have outweighed a 27 percent lifetime foreclosure rate, and the resulting loss of nearly 2.5 million homes.”

A truly powerful consumer watchdog could have stopped the subprime fire; instead, existing regulators watched as it burned down the entire housing sector. And nobody suffered more from that failure than black borrowers, who were three times more likely to be sold subprime loans than their white counterparts, at all income levels.

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I’ll never forget sitting across a table from a retired cop in Jacksonville, Fla., last spring. He sat there, with his mess of mortgage documents and foreclosure notices sprawled out in front of him, struggling to explain why he signed a subprime refinance that, in today’s light, seems such a bad bet. “If I hadn’t been so gullible,” he said, clearly frustrated with himself, “to believe … that there’s somebody there to look after the little man, there’s somebody there to prevent this kind of thing from happening, I wouldn’t be in it. My strongest disgust with the whole thing is—” he broke off and groped for the right words, then settled on a basic truth: “I don’t have a problem in you screwing me. I have a problem when you screw me and you don’t teach me the game.”

Obama’s new agency would do one better: It would deputize somebody to keep up with the game’s ever-changing rules. That’s the last thing a bloated, predatory and—as we’ve learned—dangerous banking sector wants to happen. And there’s no better proof that it’s a defense we desperately need.

Kai Wright is The Root’s senior writer. Follow him on Twitter.