Bailout backlash (pg. 3)

Soak-the-rich sentiment is so infectious right now that even the Republican nominee who championed financial deregulation nine years ago is a born-again populist. McCain vows to "end the old-boys network" he says is crippling America's financial markets, repeatedly promises tougher rules on Wall Street, and immediately declared that no bailed-out executive should make a larger salary than the U.S. President ($400,000). His advisors understand that six weeks away from the election, there was no other safe political space for their candidate to occupy.

Gingrich argues that the rise in American populism is not a revolt against business alone but a revolt against all elites, including government and media elites. In his mind this is the age of the populist Andrew Jackson, not the socialist Eugene V. Debs. "We have a national establishment that talks to itself," he says, "an elite that is dramatically out of touch with the people in a way that is not sustainable." By this thinking, Wall Street veteran Paulson touched off a populist revolt not only in the substance of what he proposed, but also in the style in which he proposed it - massive Treasury spending with minimal congressional control and no judicial oversight, which critics condemned as a "power grab."

There's much evidence to support the contention that Americans are disgusted with government officials as much as they are with business leaders. And, indeed, despite the tarnished reputation of corporate America, most people still tell pollsters they credit American business with being the backbone of the economy. So the American left shouldn't be lulled into thinking this is a revolt in favor of much bigger government. Still, the first fallout will be new laws to increase financial regulation. For the time being the bailouts have undermined the GOP argument that markets work best when left alone. Only last November, Dick Cheney told Fortune his main concern about the mortgage crisis was an overreaction by the government. "The fact is, the markets work, and they are working," he said. "We have to be careful not to have this set of developments lead us to significantly expand the role of government in ways that may do damage long-term for the economy." Ten months later the Vice President was forced to peddle the biggest government bailout in history to conservative friends on Capitol Hill. (The result was described by one participant as an "unmitigated disaster.") It will also be impossible - in the foreseeable future - for a Republican president to sell Congress any version of private accounts to augment Social Security.

While consensus is widespread in both parties that there needs to be thicker capital buffers and more openness in the financial markets, many fear what Romney calls a draconian backlash in Congress that will choke off capital flows. "The greatest danger is that we do a Sarbanes-Oxley squared on the financial system," says Harvard professor Ken Rogoff, former chief economist at the International Monetary Fund. "That would cripple what - even after this disaster - has to be regarded as one of the most innovative, dynamic sectors in the economy. It's not all evil. There's some necessary regulation: We need higher capital requirements, more transparent markets. But goodness, we don't want to choke off the sector."

In this populist environment, fat pay packages will get more scrutiny - even those not attached to federal rescue deals. For three years House Financial Services chairman Barney Frank has argued that pay packages need better disclosure to shareholders. Watch for hearings on that issue. Meanwhile, if you want taxpayer bailout money, say goodbye to that million-dollar bonus and stock-option package; Congress wants your salary to look more like that of a government employee.

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The collateral damage to the business agenda will be far more sweeping. Take trade. Even with a decent economy, Bush was unable to get major trade deals passed because a rising populist tide emboldened Democrats. Now it's going to be even harder. By contrast, an Obama agenda of aiding union-organizing efforts, raising taxes on capital gains, and imposing a windfall-profits tax on oil is looking more enticing.

Rogoff is right: Not everyone in the financial market is "evil," and there's a risk in Washington of throwing out America's best innovations - best risk taking even - with the detritus that caused today's crisis. But politically speaking, corporate America - most of which has nothing to do with the Wall Street mess - has been summarily dethroned. And it will be a long slog back. 

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