When the financial crisis first engulfed the world, opinion leaders rushed to explain it as a freak of nature, like a "perfect storm" or a tsunami that comes every 100 years. Subsequent revelations destroyed that nonsense. Like famines, financial crises are man-made. This one was made in America–invented on Wall Street and enabled by Washington complicity, Democrats and Republicans alike.

This message was delivered again by the SEC’s recent fraud charges against Goldman Sachs. The investment house sold poison to unwitting customers–financial instruments deliberately designed to fail. Sure enough, they failed, but they also helped to poison the entire system.

People are asking if anyone will go to jail. No, not yet. The SEC only charges a "civil" offense–Goldman’s failure to disclose that its hedge fund partner, John Paulson, stacked the deck. But the case has the potential to rock Wall Street and Washington politics. First, the facts scream out for deeper investigation. Securities law usually allows Wall Street con men to avoid prosecution by paying off swindled parties. Still, bankers and traders must be feeling queasy, because the Street is awash in similar manipulations–conflicts of interest that in other business sectors often qualify as criminal fraud.

Furthermore, the Goldman case could stiffen the spine of senators now working on financial reform legislation, which began as the White House’s utterly inadequate response to the economic catastrophe. Thanks to this scandal, there’s a chance that toughening amendments will greatly improve things. Sherrod Brown’s, for example, would shrink the size of bloated mega-banks. Blanche Lincoln is pushing a hard crackdown on dangerous derivatives. The proposed Consumer Financial Protection Bureau could be rescued from bank lobbyist efforts to strangle it. And Bernie Sanders is trying to put a hard cap on credit card interest rates.

Maybe Senate reformers can stiffen President Obama’s spine too. His reform strategy essentially would have turned the mess over to the Federal Reserve. His premise was folly, since the Fed had cheered on the deregulation that enabled the bankers’ reckless greed. And by putting the Fed in charge, Treasury Secretary Timothy Geithner and White House adviser Larry Summers accepted the bankers’ proposed solution: tinker with the regulatory system but do not greatly disturb Wall Street’s business model. That lets politicians evade the need to enact laws that compel real change. House Democrats went along.

The Senate, however, is now a more promising arena than expected. First, Chris Dodd, lame-duck chairman of the Banking Committee, proposed a more ambitious reform: dump the central bank as "super-regulator" and strengthen provisions to curb oversize banks. His draft is marred by weak points and may not survive the floor action, but the fight for serious reform is still alive.

GOP leader Mitch McConnell responded with his usual hypocrisy. He accused Obama and the Democrats of ratifying the bailout of mega-banks. As evidence, he cites the Senate bill’s $50 billion liquidation fund ($150 billion in the House version), to be collected from bankers, not taxpayers, but anticipating more bank crises in the future.

Republicans are falsifying the politics (since they are really fronting for bankers), but they happen to be right on the larger point: notwithstanding Obama’s claims, the Democratic legislation does not put an end to "too big to fail"; it merely authorizes Treasury and the Fed, with other regulators, to shut down dangerously overexposed financial firms that pose risks to the system–if officials so choose. But leaving this difficult choice to unelected regulators is a pipe dream. Those same regulators repeatedly failed in the past. If Congress doesn’t have the nerve to break the behemoths into smaller pieces, lap-dog regulators will not do the dirty work for them. During the last generation, the central bank and other agencies allowed banks to amass profits while taking on larger, more dangerous risks. Regulators lacked the will to intervene and spoil the good times for important clientele. When the system became endangered, it was too late for discipline.

Wall Street’s players decided, correctly, that government would come to their rescue if they went too far. And they did. That smug assumption must be smashed by strong new laws and safeguards, or taxpayers will be on the hook for more odious bailouts in the future.

Citizens need to direct their anger at weak-kneed lawmakers. Organized people are often outgunned by organized money, but people still have a shot at winning this fight–and terminating political careers if they don’t. Dodd’s bill includes strongly worded limits on the incestuous bank-to-bank borrowing that evaded the old ceilings on leverage. Senator Robert Menendez is going after the off-balance-sheet gimmicks banks used to hide debt. Senators Carl Levin and Jeff Merkley would forbid bankers from playing self-interested games against their customers, as Goldman did.

Paul Krugman, among other commentators, thinks bigness is not the problem and we should tolerate too-big-to-fail bailouts. Reform, he says, is like equipping the fire department to put out a burning building. His metaphor left out the real solution: fire prevention. Government needs to enact a new building code for the banking system–a set of stern prohibitions that protect the community from the carefree firebugs of Wall Street. The way to avoid future bailouts is straightforward: eliminate the too-big-to-save banks.