The most disturbing thing about Barack Obama’s call for financial reform was the way the president falsified our predicament. He tried to make it sound as though everyone was implicated in the breakdown and therefore no one was really to blame. “A culture of irresponsibility took root, from Wall Street to Washington to Main Street,” Obama asserted. “And a regulatory regime basically crafted in the wake of a twentieth-century economic crisis–the Great Depression–was overwhelmed by the speed, scope and sophistication of a twenty-first-century global economy.”

That is not what happened, to put it charitably. The regulatory system was not overwhelmed by historic forces; it was systematically gutted and dismantled by the government at the behest of banking interests. If Obama wants details, he can consult his economic advisers–including Larry Summers and Tim Geithner–who participated directly in unwinding prudential rules and regulations. Cheers were led by the Federal Reserve, with heavy lifting by both political parties.

If Obama were to tell the truth now about what went wrong, he would face a far larger problem trying to clean up the mess. Instead, he has opted for smooth talk and fuzzy reforms that in effect evade the nasty complexities of our situation. He might get away with this in the short run–Congress doesn’t much want to face the music either. But Obama’s so-called reform is “kicking the can down the road,” as he likes to say about other problems. In the long run, it will haunt the country, because it fails to confront the true nature of the disorders.

Giving more power to the Federal Reserve to be the über-regulator of banking and finance is a terrible idea. Asking the cloistered central bank to resolve all the explosive questions about the overreaching power of financial institutions is like throwing the problem into a black box and closing the lid. That’s the reason Wall Street’s leading firms first proposed the Fed as super-cop, then sold it to George W. Bush and now Obama. Give the mess to the Wizard of Oz, the guy behind the curtain. This constitutes the high politics of evasion.

Still, a nascent rebellion is gathering strength in Congress. Some 240 House members have endorsed a measure to force auditing of the Fed by the Government Accountability Office–a small but vital step toward dismantling the central bank’s privileged secrecy and intimidating mystique.

As someone who has been around this subject for three decades, I have come to understand that the power of financial titans and their friends at the Fed depends crucially on public ignorance. Most legislators are just as clueless as their constituents. If they knew more about how the system works, they would see that most of Obama’s reforms are insubstantial gestures, not actual remedies. The president, for instance, proposes to raise the requirements for capital and liquidity held by commercial banks with strict limits on leverage. That is a virtuous proposal, but it leaves unanswered the question, Why did the legal limits already in place fail to restrain bankers’ appetites? Indeed, several times in the past two decades the Fed and other central banks enacted new and supposedly more effective capital requirements. The big dogs of banking broke free of the leash again and again, while vigilant watchdogs at the Fed and elsewhere looked the other way. Why should we expect different results next time?

One reason the old restraints failed is the “modernization” that shifted credit functions outside regulated banks and into a variety of unregulated money pots–the so-called shadow banking system of hedge funds and private-equity firms. These interact intimately with traditional banks and give them profitable ways to evade rules or conceal the condition of balance sheets from regulators and investors. These interactions are dazzlingly complex, but this was not an accident. It was the goal of financial deregulation enacted by Bill Clinton, arm in arm with the GOP Congress.

Summers and Geithner suggest that shadowy outfits like GE Capital or major insurance companies can be regulated by the Fed as “Tier 1 Financial Holding Companies.” As Joe Nocera recently noted in the New York Times, “Tier 1″ sounds like the new name for “too big to fail.” The Fed will watch them (we are assured) to prevent “systemic risk.” But that is what the Fed should be doing already as the lender of last resort charged with defending the “safety and soundness” of the banking system. The Securities and Exchange Commission, likewise, is supposed to monitor hedge funds and private-equity firms, which thrive on secrecy. Since the SEC failed miserably to police regular corporations, this does not sound reassuring.

Another example of extremely wishful thinking is the proposed rule on securitization of mortgages. The method of bundling home mortgages and turning them into salable bonds was supposed to reduce risk; it did the opposite. The mortgage lenders were able to execute dubious, even fraudulent, loans, collect profits upfront and then sell the package to unwitting investors. Obama’s answer is to require the originating lender to retain a 5 percent interest in the mortgage and pass on the rest. That seems ludicrous and innocent of how that cutthroat world works. The financial geniuses who created the subprime scandal could hide 5 percent of the mortgage value with a couple of keystrokes–adding fees, closing costs or other dodges. To really hold lenders responsible, they should be made to hold on to something like 50 percent of liability for the original loan, with perhaps the other 50 percent assigned to whatever bank or investment house packages the mortgage security and sells it to financial markets. That would be “responsibility” with old-fashioned force.

The one bright spot in Obama’s plan is the new regulatory agency he recommends to protect consumers of financial products. This was inspired by Elizabeth Warren, the Harvard professor who has been a brave and brilliant critic of the credit card industry and other forms of predatory rip-offs. While it depends entirely on the details, this innovative agency could become the new tiger among tired, toothless regulators–especially if Obama has the courage to name Warren as the inaugural chair. The bankers hate this idea and will fight to kill it. They know this regulator will not be captive to them, at least not yet.

The essence of what’s missing in the Obama plan is hard rules. Drawing up concrete prohibitions and commandments is obviously a tougher challenge, because it requires deep understanding of the financial system. You cannot design far-reaching reforms until you understand what led to the breakdown. Since the government has avoided that kind of serious examination, it assigns these explosive issues over to expert regulators–the same experts who failed to see the trouble coming.

Right now, the imperative should be to slow down the rush to weak solutions. Congress would do well to drag its feet while it conducts deeper investigations. A promising new commission has been authorized to investigate the crisis, along the lines of the one run by Ferdinand Pecora in the 1930s, which investigated the causes of the 1929 crash. Let’s hope it is not stocked with bank lobbyists. Meanwhile, give subpoena power to Elizabeth Warren and the Congressional Oversight Panel she chairs. Hire some independent investigative reporters eager to dig deeper into the mulch. What exactly went wrong? Who has bloody hands? What fundamental reforms are needed? If the economy returns to “normal” soon, the ardor for serious reform might dissipate. That is a small risk to take, especially if the alternative is enacting the bankers’ pallid version of reform.