The Gathering Storm

Despite a tough-sounding speech, George W. Bush is suddenly vulnerable on the defining domestic issue of his presidency. The cascading corporate scandals are more than a temporary blow to investor confidence. They are a serious threat to American capitalism -- and Republican doctrine.
Bush is at risk of becoming a Cinderella president. Terrorist attacks elevated him from an untested pretender with no mandate into a popular commander in chief. Now a domestic economic crisis, eerily reminiscent of Bush's own dubious financial history, could turn him back into a bumpkin.

On issue after issue, Bush's grand strategist, Karl Rove, has sought to blur the differences between Bush and his political opponents -- to "take Democratic issues off the table," as Rove likes to say. Tuesday's New York speech tried to get Bush back ahead of the curve and position him as tough on corporate crime.

But this act will be much tougher to pull off. Real reform demands not just tougher penalties; it will require an ideological reversal of two decades of Republican theory and practice.

For, as even Bush tacitly admits, the remedy for the self-dealing, the accounting frauds, and the other conflicts of interest that are now placing the entire economy in jeopardy is government regulation -- something the Republicans have vilified since Ronald Reagan.

The entire system of self-regulation has collapsed. Free markets, it turns out, don't prevent brokers from peddling junk to unsuspecting investors while they enrich themselves or auditors from conspiring with executives to cook company books.

Market discipline doesn't stop insiders from selling shares they are promoting to the public even as the company is rotting from within or senior company officials from looting the pensions of workers or CEOs from scheming to pump up stock so they can cash in options. Only regulation can change these perverse incentives.