Meanwhile, the drive to inject these issues into the financial system's formal rules is already under way. In essence, the "social screens" pioneered by "socially responsible investor" funds--excluding rogue products and companies from the portfolio--would be reformulated to market standards. Nappier has promoted the development of an alternative Standard & Poor's 500 index, alongside the existing one, that would include only companies actively committed to sustainable economics. A rival S&P index could deliver serious injury to the stock prices of companies that get kicked out of the "white hat" 500.

Since the risk-rating agencies also failed utterly to alert investors to scores of fraudulent corporations in the recent wave of business scandals, they too are becoming more sensitive to the reform critique. Social issues do affect returns. Contrary to market lore, the accumulated evidence shows that the best-managed and least socially destructive companies also perform better in the stock market than "low road" rivals in the same sector.

Major pension funds, in the end, will still need to diversify their holdings, but diversification can be done more astutely than passive indexed investing that simply buys stocks across the market without making any distinctions. The CalPERS professional staff is designing an experimental index that reflects the overall economy but leaves out companies with a record of high risks and price volatility--factors typically accompanied by negative behavior on "social issues." If this proves successful, CalPERS will have invented a new investment model that other funds can adopt. Angelides also envisions "actions of consequence" for truly notorious corporate behavior. "If there are recalcitrants," he suggests, "you kick them out of the index."

The reformers will get no help from Washington. The Bush Administration clearly stands with the CEOs, who whine about the burdens of complying with the new, rather modest reform regulations. On the other hand, the stock market is still sick, limping sideways for the last three years because investor distrust remains strong. Angelides likes to point out that after the crash of 1929, it took the stock market twenty-five years to regain its old peak.

Democrats have a political opportunity in this situation. They can rally around reformers and build popular support for their social-economic agenda. Or they can remain quiet so as not to offend very powerful corporate-financial interests. Their choice may tell us something about the party's future.

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