Summer Of Mistrust

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Luntz warns politicians that these are people who almost always vote. "The Irritable Voter is the one I'm afraid of," he says. "Someone who had something and lost it." For Democrats, the political beauty of the corporate scandals is that they "play into what people already believe" about Republicans--"that these guys are in the tank with corporate special interests," says Steve Elmendorf, chief of staff to House minority leader Dick Gephardt. "I don't see any downside to this for us." But when the interests of voters clash with the interests of donors, the Democrats too put on the brakes, helping kill McCain's demand that companies list stock options as expenses on their books.

America's gilded ages have reliably ended in scandal, followed by soul-searching and reform. But investors are divided over what needs to be done. The gentle, self-policing era that SEC chairman Harvey Pitt proclaimed last October is dead and gone, but even some battered investors don't trust grandstanding lawmakers to distinguish between reforms that are needed and those that will cramp the recovery even more. That was the argument Dick Cheney and others made to the President--that in the long run, Bush will suffer more if he gets a quick political boost from reforms that strangle the economy. While more Americans now see Big Business as a threat, polls show they think Big Government is more dangerous yet.

There are still plenty of cool-headed investors out there who have seen these bumps before and are confident the market will come back eventually. But that has a way of taking years, even without a crisis of ethical confidence. Stocks didn't return to their 1929 levels until 1940; they took 30 years, till 1996, to return to the peak reached in 1966. Many stocks still aren't cheap, third quarters are often painful, and the bears, at least, think there's more bad news to come.

Maybe it was just a coincidence that Attorney General John Ashcroft told us there could be thousands of al-Qaeda sleepers lying in wait among us. But then maybe it wasn't. If the war against terrorism drags on--if there are more attacks--will people find themselves feeling helpless once again in the face of an elusive enemy who hits and runs and can't be found? Or does the threat become a blessing, keeping people united against a common danger and forgiving of leaders who face challenges greater than figuring out how stock-option grants should be handled on balance sheets? "If they find Osama bin Laden's body," says a Republican close to the White House, "that'll push everyone back 10 to 15 feet." And if they don't, Bush can still argue that there are far more dangerous enemies out there than the sharks in our own seas. --Reported by Melissa August, James Carney and John F. Dickerson/Washington, Rita Healy/Denver, Sean Scully/Los Angeles and Nathan Thornburgh/Seattle