The White House wants something. Congress wants something. If politics is the art of the possible, the time may have come for a deal where the Democrats demand the replacement of Alberto Gonzales with someone they trust to oversee the government's activities in exchange for the new powers they are requesting. Even if Bush says no (and he probably will, although he shouldn't), he will be blamed for it.
Think about it for a moment. The main reason we don't want to expand the government's power is that we don't trust who's running it. The government already has incredibly intrusive powers which are already being abused. Making these abuses illegal will not, in the short term, stop them. Installing someone who will prosecute these abuses will; that's what we really want.
Democrats should announce a short list of candidates to replace Alberto Gonzales and make clear that the President need not pick from that list but if he wants to play with shiny new powers, he's going to need adult supervision. I don't know who they might suggest, I would have said Eliot Spitzer up until about a week ago. Someone with a degree of credibility on both sides of the aisle who would actually do the job. Perhaps commenters can help to generate a short list.
In any event, Bush can't fire Alberto, presumably because he knows too much. He will refuse any such offer, but it will be clear, then, that what Bush wants is power to abuse rather than power to keep Americans safe, and it will be clear that he is the one standing in the way of these "urgently" needed updates to the law.