Democrats are nervous. Really nervous. They would like nothing more than to turn the page on their health care takeover, taxpayer-funded bailouts, reckless spending, and exploding debt. In the face of fierce political headwinds, the party running Washington is making an effort to advance its ideology at all costs.

Financial regulatory reform, the thinking goes, provides Democrats an issue where the politics finally align with the Left's policy preferences. Republicans, they believe, can be walked into a convenient political trap by opposing what Democrats call "Wall Street reform." President Obama has mastered the art of bank populism, premised on class warfare, by tapping into powerful emotions of envy, anger, and fear.

From an ideological perspective, big government can combine with big business to advance a more progressivist society. For self-described "progressives," the agenda is straightforward: expand government; co-opt big business; direct the capital markets from Washington to pursue "social justice." Think Fannie and Freddie by much higher orders of magnitude.

Over the past decade, the thinking has been much less clear for conservatives. Being "pro-market" has been fundamentally confused with "pro-business." Conservatives who came to Congress to defend and promote free enterprise have often been led to believe that pathway lies in bolstering established firms as they navigate the maze of government regulations and taxes. These instincts are correct, but the implementation is often flawed. All too often, the results of these efforts have been to exacerbate crony capitalism - erecting barriers to entry against potential competitors to firms that are currently on top.

For their part, companies seeking such protection have a right to pursue their narrow self-interest; but when these actions involve reducing open competition and transparency for short term gain, they do so to the detriment of the very free enterprise system that made their success possible.

Republicans, who profess their zeal for democratic capitalism as the greatest source of human flourishing, all too often have aided the "kings of industry" in pulling the drawbridge up after they've taken the castle. Conservatives must recover the fundamentals of what is needed to defend the free enterprise system. We can begin by rejecting the current financial regulatory overhaul moving through Congress, and by offering alternatives that apply the essential principles that form a true free enterprise system.

The financial regulatory overhaul is not reform. Its fundamental architecture expands and centralizes power in Washington, doubling down on the root causes of the 2008 crisis. It is based on a vision that government can foresee future crises and avert them, despite the fact that an army of regulators never saw the most recent crisis coming.

The complex array of new councils, agencies, and bureaucracies creates endless channels for crony capitalists to penetrate. A financial system that once thrived on entrepreneurial risk and low barriers to entry for investment will now deny admittance to everyone except those sophisticated enough, connected enough, and flush enough with campaign contributions to do business with government and pay the price of entry.

Institutions deemed "too-small-to-succeed" would not be afforded the explicit protections given to the largest firms, resulting in higher borrowing costs and higher hurdles to succeed relative to their well-connected competitors. Unprecedented authority over the operations of financial institutions would be vested in the Federal Deposit Insurance Corporation (FDIC). The FDIC would be authorized to seize risky financial institutions if a council of regulators, chaired by the Treasury Secretary, believes a company is in danger of default and poses systemic risk. Once a company has been seized, the FDIC oversees its entire resolution process, including restructuring the order of creditor obligations - serving as creditor, manager, and referee.

Conflicts of interest will inevitably arise on how to treat creditors of failed firms, and increasingly, what were once economic decisions will now be political decisions. Dispelling the market discipline of our profit-and-loss free enterprise system, collusion between government bureaucrats and their private-sector counterparts will determine winners and losers.

Despite roughly 1400 pages of text in the legislation, the destructive role of the government-backed housing giants remains a glaring omission. Enabled by Congress, Fannie Mae and Freddie Mac wrought havoc on the housing market and remain on operational life support as taxpayers subsidize their failure. After their leading role in the sub-prime mortgage crisis, they've received $145 billion in taxpayer dollars, with no limit to additional funding. Fannie and Freddie demonstrate just how big federally blessed and guaranteed businesses can grow - and just how hard they can fall.

A number of key corrections to mitigate crony capitalism's destruction have been rejected throughout the Senate debate. Senator John McCain, for example, offered an amendment to end the privatized profit/socialized loss model of Fannie and Freddie, phasing out costly taxpayer subsidies. House Republicans have also put forth serious reforms for Fannie and Freddie, as part of our larger financial reform alternative - despite being shut out of the process in House.

There is no shortage of innovative alternatives to the heavy-handed government approach making its way through Congress - alternatives that make the distinction between "pro-market" and "pro-business." Although a bold departure from the status quo, a proposal put forth by Boston University economist Laurence Kotlikoff calls for banks to stick to their fundamental purpose of financial intermediation rather than taking on the excessive risks with no strings attached that have lead to taxpayer-funded bailouts. Real reform must decouple America's economic well-being from the fate of a select few financial firms.

Another approach, one that works within the current financial framework, has been offered by Oliver Hart of Harvard University and Luigi Zingales of the University of Chicago. Their proposal addresses the "too-big-to-fail" question through the use of a market-based trigger that tells firms when to beef up capital. This approach is aimed to better balance "the need to curb reckless risk-taking...while making sure not to unduly constrain economic activity, investment and growth."

Failure to reform the system poses clear risks, but the frenzied push to score a legislative victory prior to the November midterms with a deeply flawed bill poses greater risk. A good-faith reform effort should not continue indefinitely, but the Financial Crisis Inquiry Commission, for example, has been essentially cast aside by the very same Congress that tasked the commission to investigate the crisis and issue its report later this year. The Democratic leaders on both ends of Pennsylvania Avenue have opted to rush a bill into law, putting ideological goals and campaign strategy ahead of underlying catalysts for real reform.

The federal government has a critical role in helping ensure financial markets are fair and transparent, and holding accountable those that violate the rules. Reform should aim to restore the principles that have made credit available to American families and entrepreneurs and our capital markets the envy of the world: freedom to participate, an unbreakable link between performance and reward, continued attachment to risk, and a sense of responsibility that ensures those who seek to reap the gains also bear the full risks of losses.

For millions of American families, the real pain from the past financial crisis can still be felt. The financial services sector needs reform - yet the overhaul before Congress exacerbates the worst aspects of today's system. Washington is attempting to solve every problem with greater government control, and higher spending, taxes, and record levels of debt - breathing new life into crony capitalism across our economy.