The U.S. economy has diverged: Wall Street is living high on the hog while everyone else is struggling. The Dow Jones Industrial Average eclipsed 10,000 for the first time since last October this week, even as unemployment continues to spiral out of control. And while President Barack Obama has taken some very real steps to help ordinary people, his administration’s efforts to save Wall Street have far outstripped their support of workers.

Matthew Rothschild details these disparities for The Progressive. Regulatory reforms are moving through Congress at a snail’s pace and the wreckage from the mortgage bubble is increasing. Wage cuts are more widespread today than in any era since the Great Depression, even as bankers capitalize on taxpayer bailouts to score epic profits and outsized bonuses.

“One economy is for the rich and the upper middle class,” Rothschild writes. “The other economy is for everybody else.”

So how can a few big banks make so much money while the rest of the economy suffers? As Kevin Drum explains for Mother Jones, the kind of banking that helps the economy is a pretty simple business of taking deposits and making loans. But a lot of what we now call “banking” really just consists of making bets on just about anything you can dream up.

“Banks aren’t using all this cheap money to increase lending. They’re using it to fund bigger and bigger bets in the fixed-income sector — the same sector that brought us junk bonds, credit default swaps, subprime loan securitization, interest rate carries, collateralized debt obligations, and all the rest of Warren Buffett’s ‘financial weapons of mass destruction.’”

The banks, in other words, are gambling with taxpayer money. A host of big finance companies have reported earnings in the past week, and the numbers are ugly: JPMorgan Chase reaped $3.59 billion in third-quarter profits and Goldman Sachs is planning to payout $23 billion in bonuses from speculative trading, while Bank of America and Citigroup are hemorraging money on mortgages and credit cards. The Wall Street casino is alive and well, but anything that is actually tied to the real economy is a disaster.

According to a new report from the U.S. Treasury, lending among the largest recipients of the Troubled Asset Relief Program fell by 17% from July to August. Small businesses can’t cope with the cutoff in financing. A lot of businesses stay profitable over the long-term by borrowing money to meet short-term expenses. A baker can borrow money to buy flour and pay the bank back when she sells her bread. With bank lending on ice and consumers cutting back on spending, many small businesses are failing. Thousands more will be at risk in the next couple of years while unemployment remains elevated.

Writing for Salon, former Clinton Secretary of Labor Robert Reich notes that these economic struggles are not reflected in major stock indices. Stock are soaring as big corporations who don’t need bank loans score short-term profits from cost-cutting, i.e., mass layoffs. Obviously, this strategy can’t work for very long. When millions of Americans are out of work, they can’t afford to buy the things companies make.

There’s an important lesson in our current economic state-of-affairs, as Katrina vanden Heuvel emphasizes for The Nation. The bailout has not done what Henry Paulson told us it would do. To be sure, it saved the banks– even the strongest banks would have failed last fall without extraordinary government support. But it has not increased lending and kept the economy from disaster. The Obama administration, which has extended the Bush administration’s support for bank balance sheets and bonus checks, is facing a political nightmare if it doesn’t show produce some stronger economic results for ordinary citizens.

“Heading into 2010, the Obama administration must put itself back on the side of working people,” vanden Heuvel writes.

The administration must address two critical problems in order to restore the nation’s economic credibility. Putting the unemployed back to work is at the top of the list. Anything that saves jobs will help, including aid to states to keep teachers and cops on government payrolls and tax credits for companies that hire new full-time workers.

Something must also be done about the foreclosure epidemic. Nothing underscores our economic disparity like continuing housing mess, which has been in full-blown crisis mode since 2006. Despite a multi-trillion-dollar bank bailout, foreclosures are surging to all-time highs. Writing for The American Prospect, Tim Fernholz details the prolonged problems with the Obama administration’s current foreclosure relief program.

While millions of troubled borrowers are eligible for the plan, which reduces monthly mortgage payments to affordable levels, foreclosures are still outpacing loan relief efforts by more than two-to-one.

Banks are dragging their feet and the administration has imposed no penalties on lenders who don’t live up to the program’s standards. Instead, the Treasury Department is offering banks cash incentives to keep people in their homes. Bank of America, which has received $45 billion in direct government bailout funds, plus hundreds of billions in government guarantees and other perks, has modified merely 11% of the mortgages it controls that are eligible for the plan.

Fernholz offers several potential improvements to Obama’s foreclosure relief plan, including more aggressive government policing of the current plan and allowing foreclosed homeowners to continue to live in their homes as renters. With up to 12 million foreclosures projected by the end of 2012, just about anything the administration does will help.

The economy is a measure of social well-being, not a stock market index or a corporate earnings statement. Policymakers need to prove they can respond to the very real needs of all their citizens, not just those with financial clout.

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