WASHINGTON (MarketWatch) – If you can’t beat ’em, join ’em, seems to be the motto in mind for financial consumer advocate Elizabeth Warren as Democrats reportedly are urging her to challenge Republican Sen. Scott Brown of Massachusetts in the 2012 election.

The Harvard professor spearheaded the effort to get a Consumer Financial Protection Bureau into the Dodd-Frank financial reform act, and has been tasked by President Obama with helping to set up the new agency, designed to police predatory lending, credit card abuses and other attempts by financial institutions to fleece their customers.

Banks, understandably, don’t like the idea of the new agency and don’t like Warren, and they have persuaded 44 Republican Senators – by means it’s easy to guess at – to block the nomination of Warren or anyone else as first director of the new agency.

Consumer Financial Protection Bureau Advisor Elizabeth Warren Reuters

This has prompted calls for Obama to install Warren with a recess appointment, though some worry that’s a poor way to establish the legitimacy of a brand-new agency.

So now the idea seems to be to exploit Warren’s fame as champion for the consumer agency and from her earlier role as head of the Congressional Oversight Panel for TARP and have her reclaim Ted Kennedy’s old seat for the Democrats. This would also free the way for Obama to find someone who is less of a lightning rod to head the new agency.

The seat that Brown won in a special election after Kennedy’s death in 2009 is one of those Senate Democrats would love to capture next year. Brown is trying to walk the tightrope between the tea party’s stringent orthodoxy requirements and a left-leaning Massachusetts electorate, and is seen as exceedingly vulnerable.

It’s an idea that has a lot going for it, but it’s a tough call. Warren could consider the creation of the CFPB as her accomplishment and make a bid to give it political cover from the Senate. She could also be a forceful progressive advocate on a wide range of other consumer and financial issues. On the other hand, it may seem to be caving in to Republican bullying on the CFPB.

Various reports have tried to douse the speculation since a New York Times story thrust a possible Warren bid into the spotlight on Tuesday. Warren herself has issued only the classic non-denial denial that she is focused 100% on her current job of building the CFPB.

The very fact Warren’s candidacy is being discussed shows how wide open next year’s election is in this polarized political environment. It’s probably too early to measure Obama’s coattails, but the decision this week by Indiana Gov. Mitch Daniels not to run for president has left the Republicans with a lackluster lineup of candidates that makes Obama’s reelection victory likelier than ever.

Much of the Democratic focus now will be on retaining control of the Senate and seeing how far they can exploit Wisconsin Rep. Paul Ryan’s poisonous budget proposal to turn the tide in the House.

The upset victory of Democrat Kathy Hochul in Tuesday’s special election for a House seat in western New York – snatching a sure victory from Republican Jane Corwin in the wake of the Ryan proposal – will lend new vigor to that effort.

The Republicans are clearly on the defensive, with polls showing that a majority of Americans don’t like Ryan’s idea of dismantling Medicare. After successfully shifting the political debate to the deficit – a bogeyman in the face of continued low interest rates and low inflation – Republicans have shot themselves in the foot by overreaching on the budget proposal.

Massachusetts’ Brown has already broken with the Ryan proposal, arguing in an op-ed that escalating medical costs might outstrip government voucher subsidies in the plan, leaving seniors uncovered – the crux, by coincidence, of Democratic opposition to the plan.

Meanwhile, the continuing Republican antipathy to Warren was on display Tuesday when she testified at a congressional hearing where panel chairman Patrick McHenry of South Carolina – in a breach of decorum that shocked even jaded Hill staffers – twice suggested his witness was lying, earning a rebuke in each case from Democratic colleagues on the House Oversight subcommittee. Read our story on the hearing.

A visibly stung Warren kept her cool. She has worked hard in the past months to persuade critics that she would be a fair administrator of the new agency, but the apparently visceral objection of Republican lawmakers to her appointment seems not to have abated.

As Kentucky Democrat John Yarmuth said in apologizing to Warren for McHenry’s insult, “The questioning of your veracity when there is documented evidence that you are being totally truthful indicates to me that this hearing is all about impugning you because people are afraid of you.”

The question now is where Warren can best put that fear to use – heading the consumer agency she has championed or stepping onto a bigger political stage.