Do crazy people know when they're crazy? Evidently, we don't.

"Americans enter the New Year in a strange new role: financial lunatics. We’ve been viewed by the wider world with mistrust and suspicion on other matters, but on the subject of money even our harshest critics have been inclined to believe that we knew what we were doing. They watched our investment bankers and emulated them: for a long time now half the planet’s college graduates seemed to want nothing more out of life than a job on Wall Street.

"This is one reason the collapse of our financial system has inspired not merely a national but a global crisis of confidence. Good God, the world seems to be saying, if they don’t know what they are doing with money, who does?"

That's from Michael Lewis ("Liar's Poker") and David Einhorn ("Fooling Some of the People All of the Time"), in an op-ed piece today.  Einhorn and Lewis provide plenty of evidence of American lunacy.  Take the example of Bernie Madoff, where plenty of people knew something (big! even shattering!) was wrong with Madoff's secretive hedge fund business, but did nothing about it.  If you were a sane overseas investor, would you rush to do business with America?  If you were living in a developed nation and looking for other developed nations to invest in and trade with and lend money to, would America be at the top of your list once you'd been apprised Madoff's $50 billion default, or if you'd fully digested the standards governing our financial markets?

"Richard Fuld, the former chief executive of Lehman Brothers, E. Stanley O’Neal, the former chief executive of Merrill Lynch, and Charles O. Prince III, Citigroup’s chief executive, may have paid themselves humongous sums of money at the end of each year, as a result of the bond market bonanza. But if any one of them had set himself up as a whistleblower — had stood up and said “this business is irresponsible and we are not going to participate in it” — he would probably have been fired."

Meanwhile, down the Street, those who were responsible for issuing bond ratings deliberately skewed their ratings.  Moody's and Standard & Poor's knew what the score was.  "Seldom if ever did Moody’s or Standard & Poor’s say, 'If you put one more risky asset on your balance sheet, you will face a serious downgrade.'" So there went Fannie and Freddie and AIG, initiating the biggest financial crash in American history.

My guess is we knew all along we were crazy (I was told back in 1992 to sell one particular stock because its financial service arm would bring it down).  Plenty of wise heads knew what would happen -- and warned us.  Our attitude was, "Bubbles don't pop."  That was what we called "smart" and "savvy."  After all we could depend on the cop on the corner to save our skins. 

But take a look at that cop:

"...The S.E.C. itself is plagued by similarly wacky incentives. Indeed, one of the great social benefits of the Madoff scandal may be to finally reveal the S.E.C. for what it has become.

"Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors. ..."

"Somehow evolved"?  Lewis and Einhorn figure it's been a little more deliberate than that.

"If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it."

Bottom line:  we the people have gone crazy.  We like bubbles!  And somewhere in the back of our muddled, morally iffy mindset, many of us still cling to our admiration for the creative financial piracy practiced by our megabillion financial marketeers.  We certainly seem willing to reinforce the bad, old ways.  Regulation and oversight are areas in which "change" is a dirty word.

"...18 months into the most spectacular man-made financial calamity in modern experience, nothing has been done to change that, or any of the other bad incentives that led us here in the first place."