Why we should all bow before Elizabeth Warren (even if you've never heard of her).

Five years from now, when Tesla Sedans and Facebook and American Idol have miraculously powered America out of its second Great Depression, historians may share a belly laugh about the days—not that long ago!—when respected economists and policymakers spent trillions of borrowed dollars attempting to bail out "toxic" and "troubled" assets, as though they might rehabilitate a subprime mortgage gone bad with a solid hug, maybe a week at Promises for one of those nonperforming (but still chic) California jumbo mortgages. Problem solved! Of course these much-maligned assets were not really the problem, they will chortle. It was the people underlying these assets who were truly troubled; it was the institutions that overleveraged so many Americans so insidiously that were really toxic.

How could we have been so blind? they will wonder.

That the American financial system itself is irreparably broken is already obvious enough to a handful of public figures as diverse as the president of China, the most recent Nobel laureate in economics, and even Jay Leno, who last month personally chided the president for delegating our national nightmare to a banker, a Bush-era strategy that has proven disastrous for more than a year. But I'm convinced that no one grasps the true nature of our hard times better than Elizabeth Warren, the Harvard Law School professor who last month revealed that TARP, the original asset-bailout program that she oversees, had resulted in taxpayers subsidizing tens of billions in investor profits while producing no discernible uptick in bank lending.

Way back in 2003, Warren—a pretty, blue-eyed former Republican farm girl from Oklahoma who rose to become one of Harvard Law's rare female tenured professors—and her daughter published a groundbreaking study of Americans' financial woes titled The Two-Income Trap. The book arose from Warren's tenure as senior adviser to Bill Clinton's National Bankruptcy Review Commission, which might, like TARP, also have become a study in frustration. Handed the task of figuring out how bankruptcy rates could be higher than during the Great Depression—and rising—in prosperous times, Warren was denied the cooperation of the financial industry. So she decided to pore over thousands of pages of federal surveys of household spending patterns that had been ignored for decades. What she found was that modern American households are worse off than their counterparts of a generation ago, even with an additional breadwinner—hence, the title. Today's families literally cannot afford not to borrow, and unregulated financial products, with their limitless interest rates and myriad fees, are literally killing them.

That Americans' financial troubles were not, generally speaking, the result of moral failing was news to Warren, who, a hint of exasperation in her voice, recently told me, "The notion that consumers need more protection in this marketplace must be clear to everyone by now." But arguing for regulatory reform does not get you an audience with Oprah, whose couch tends to be a bully pulpit for the self-help gurus like Suze Orman rather than a classroom for academics like Warren. "When it comes to making decisions with money," Orman told her female fans a couple of years ago, "you refuse to own your own power, to act in your best interest. ... You simply won't bring yourself to take care of yourself financially, especially if those actions compete with taking care of those you love. ...Y our inner nurturer reigns supreme." Guess who sells more books.

Warren brought her research to Capitol Hill in 2005, when Congress took up legislation to restrict Americans' access to bankruptcy, a tradition that predates the Bill of Rights, but, as it turned out, the vast majority of politicians were as eager to hear it as the queen of talk. Led by Wisconsin Republican James Sensenbrenner, Congress member after Congress member took the floor to disparage broke Americans as "gamers" before throwing them to the wolves. In retrospect, the inaptly named—and horrifically timed—Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was a warm-up for TARP, sending the message that even Democrats would bail out the banks rather than the middle-class families struggling to make ends meet.

A year later, Warren published a brilliant essay describing just how far the pendulum has swung since the Great Depression. We live, she observed, in an era of "runs on the customer," in which banks and credit card companies and insurers use credit scoring and gimmicks like universal default to pile on their most vulnerable customers, often driving them into foreclosure, default, and bankruptcy. (Runs on customers no longer require a late payment or credit card run-up—or any excuse at all, really. American Express (AXP), for example, will increase your rate or lower your limit based on where you shop; Capital One (COF) will shaft you and blame the "economic climate." At least you don't have to obsess over your FICO score any longer, I guess.) Warren's essay contained an implicit warning: Whether you ruin the customer or the bank first is irrelevant; in either case, you're headed for a systemic collapse.

Three short years later, as Warren's prophecy began to come true in the form of a wave of bank failures, then-Treasury Secretary Hank Paulson continued to ignore reality, this time blaming not "gamers" (they had served their purpose passing bankruptcy reform) but a new class of evil-doers: the "subprimers." (Phil Gramm, a UBS (UBS) director and husband of a former Enron director, surmised that "whiners" were at fault. Yes, this is a gratuitous observation. Forgive me.) The first acknowledgement of a problem came months later, as did a little sympathy, though not for the families who were getting booted out of their homes or the elderly people who were eating God-knows-what in order to make it through to the next Social Security check. No, sympathy arrived for the mortgages and the securitized credit card receivables that had done in those families. The assets, we were told, were "troubled" and needed to be bailed out. Of course, the public did not seem too concerned about the plight of these "assets" that had caused them so much harm; indeed, polls showed that Americans were overwhelmingly against the bailout, so TARP was shoved down our throats using the specter of a global economic meltdown instead. I suspect that Warren was appointed to oversee TARP in no small part because her name added much-needed credibility.

I first met professor Warren in 2005 during the production of a documentary called Maxed Out. She was my last and shortest interview, but she ended up in the film more than anyone else and became its star. Speaking in a professor's confident tone, she explains the contradiction that bank profits are rising in lockstep with defaults, foreclosures, and bankruptcies. Her conclusion is so obvious you instantly make it your own, her insights razor sharp, often scathing: "Only in America do people save to go bankrupt" is one of my favorites.

Maxed Out was released in March 2006, just as a few of the newly empowered Democrats, led by Chris Dodd and Carl Levin, were promising to hold the financial industry accountable for a host of insidious and predatory practices that were already wreaking havoc with Americans' financial security. Citigroup (C) and Chase (JPM) hastily announced that they would abolish a few of their more nefarious practices. Consumer advocates who had suffered 30 years of deregulation and six years of ignorance were ecstatic, certain that other institutions would fall in line or else risk the wrath of the Senate Banking Committee, but nothing happened in the months that followed. Within a year, Citigroup's credit card division asserted its right to resurrect the old practices, including a clause that allows the bank to raise interest rates "at any time for any reason." When Obama won the nomination last year, Warren was asked to offer some economic advice. I called her and asked if she detected change she could believe in.

Now, Warren, who has spent the better part of a decade fighting for the rights of the maxed-out American family, finds herself with a new mandate: protecting the largest investment of tax dollars in history. Yet if we could place all of these troubled and toxic bad apples on a rocket and blast them into outer space, Warren cautions, we would still be left with deeply troubled American households. "I suspect," Warren recently told me, "there are many people, particularly in the financial services industry, who wish we could hit the reset button, and it would be 2005 again. They would make great profits and the country will continue to hum along. But this crisis has shown us that not only were millions of middle-class Americans left behind; much of the great wealth at the top was part of a pyramid scheme."

We'll soon find out if China and Japan and Saudi Arabia want to double down by ponying up the trillions necessary to keep the scheme going a bit longer. The argument of those in the financial services industry that Warren mentions—as well as most politicians, by the way—seems to be thus: We're America, we've always paid in the past, and everyone knows that as long as you keep making the minimum payment, you get more credit! Therefore, we can borrow our way out of this crisis, too. (Note to Obama and Geithner: There is an excellent chapter on this sort of behavior in The Two Income Trap titled "The Cement Life Raft." 'Nuff said.)

I picked up a dog-eared copy of The Two-Income Trap the other day and reread the awful truth. For some reason, it still shocks me that motherhood is bankrupting more mothers than Prada or Nordstrom (JWN) or anything else, though motherhood may soon be replaced by medical emergencies or home "ownership." Obviously, it's difficult to stay a credible nation when raising children, staying healthy, and/or buying a roof to put over one's head are pushing most of the populace over the abyss—a rather scary reality that our lenders, who are already beginning to sound like debt collectors, seem to realize. When I tell Warren that everything seems to go back to her original research, she is too modest to agree, throwing out a truism instead: "We can't have a modern economy without solvent banks, but we can't have solvent banks or a functioning economy without solvent families." That such a notion remains controversial is almost mind-numbing.

Before the crisis, Warren used to confront members of Congress and ask for the endgame plan for all the debt piling up in the economy. She was inevitably greeted with blank stares and empty smiles. She used to write letters to Alan Greenspan. They went unanswered. Now, as one of the most important people in D.C., she is writing letters to Tim Geithner that sometimes suffer the same fate. "We do not seem to be a priority for the Treasury Department," Warren observed during her most recent testimony, explaining why her panel has not received any explanation for the Treasury's $80 billion overpayment for the first round of toxic assets.

Geithner may believe that when wishful thinking is the linchpin of economic policy, transparency is irrelevant. If so, he will find a formidable opponent in Warren, who understands that the bailouts are about much more than cleaning up balance sheets. "Aligning the interests of Americans and the financial services industry is critical," she tells me. "We can't perpetuate the notion of secrecy on Wall Street any more than we can tolerate the secrecy of how a credit card works or the underlying setup of the home mortgage. American families must be at the decision-making table, both for their own economic survival and for the survival of the country." Amen.

<!--StartFragment-->(Photo of Royal crown by Photodisc/Getty Images, Photo of Elizabeth Warren by Chip Somodevilla/Staff/Getty Images) <!--EndFragment-->