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? Incredibly, intelligent people the world over remain willing to lend us money and even listen to our advice, they appear not to have realized the full extent of our madness. We have at least a brief chance to cure ourselves. But first we need to ask: of what? To that end consider the strange story of Harry Markopolos. Mr. Markopolos is the former investment officer with Rampart Investment Management in Boston who, for nine years. tried to explain to the Securities and Exchange Commission that Bernard L. Madoff couldn't he anything other than a fraud. Mr. Madotfs investment performance, given his stated strategy, was not merely improbable but mathematically impossible. And so. Mr. Markopolos reasoned. Bernard Madoff must be doing something other than what he said he was doing. In his devastatingly persuasive 17-page letter to the S.E.C.. Mr. Markopolos saw two possible scenarios. In the 'Unlikely" scenario: Mr. Madoff, who acted as a broker as well as an investor, was "front-running" his brokerage customers. A customer might submit an order to Madoff Securities to buy shares in I.B.M. at a certain price, for example, and Madoff Securities instantly would buy I.B.M. shares for its own portfolio ahead of the customer order. If I.B.M's shares rose. Mr. Madoff kept them; if they fell he fobbed them off onto the poor customer. In the "Highly Likely" scenario, wrote Mr. Markopolos, "Madoff Securities is the world's largest Ponzi Scheme." Which, as we now know, it was. Harry Markopolos sent his report to the S.E.C. on Nov. 7, 2005- more than three years before Mr. Madoff was finally exposed- but he had been trying to explain the fraud to them since 1999. He had no direct financial interest in exposing Mr. Madoff- he wasn't an unhappy investor or a disgruntled employee. There was no way to short shares in Madoff Securities, and so Mr. Markopolos could not have made money directly from Mr. Madoffs failure. To judge from his letter, Harry Markopolos anticipated mainly downsides for himself: he declined to put his name on it for fear of what might happen to him and his family if anyone found out he had written it. And yet the S.E.C.s cursory investigation of Mr. Madoff pronounced him free of fraud. What's interesting about the Madoff scandal, in retrospect, is how little interest anyone inside the financial system had in exposing it. It wasn't just Harry Markopolos who smelled a rat. As Mr. Markopolos explained in his letter. Goldman Sachs was refusing to do business with Mr. Madoff: many others doubted Mr. Madoffs profits or assumed he was front-running his customers and steered clear of him. Between the lines, Mr. Markopolos hinted that even some of Mr. Madoffs investors may have suspected that they were the beneficiaries ofa scam. After all, it wasn't all that hard to see that the profits were too good to be true. Some ofMr. Madoffs investors may have reasoned that the worst that could happen to them, if the authorities put a stop to the front-running, was that a good thing would come to an end. The Madoff scandal echoes a deeper absence inside our financial system, which has been undermined not merely by bad behavior but by the lack of checks and balances to discourage it. "Greed" doesn't cut it as a satisfying explanation for the current financial crisis. Greed was necessary but insufficient: in any case, we are as likely to eliminate greed from our national character as we arc lust and envy. The fixable problem isn't the greed of the few but the misaligned interests of the many, A lot has been said and written, for instance, about the corrupting effects on Wall Street of gigantic bonuses. What happened inside the major Wall Street firms, though, was more deeply unsettling than greedy people lusting for big checks: leaders of public corporations, especially financial corporations, are as good as required to lead for the short term. Richard Fuld. the former chief executive of Lehman Brothers. E. Stanley O'NeaI, the former chief executive of Merrill Lynch, and Charles 0. 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. Not immediately, perhaps. But a few quarters of earnings that lagged behind those of every other Wall Street firm would invite outrage from subordinates, who would flee t'or other, less responsible firms, and from shareholders, who would call for his resignation. Eventually he'd be replaced by someone willing to make money from the credit bubble. OUR financial catastrophe, like Bernard Madof'f's pyramid scheme, required all sorts of important. plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today's financial markets is immense. Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that's the problem: there is no longer any serious pressure from outside the market, The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest. The credit-rating agencies, for instance. Everyone now knows that Moody's and Standard & Poor's botched their analyses of bonds backed by home mortgages. But their most costly mistake - one that deserves a lot more attention than it has received - lies in their area of putative expertise: measuring corporate risk. SAY what you will about our government's approach to the financial crisis, you cannot accuse it of wasting its energy being consistent or trying to win over the masses. In the past year there have been at least seven different bailouts, and six different strategies. And none of them seem to have pleased anyone except a handful of financiers. When Bear Stearns failed, the government induced JPMorgan Chase to buy it by offering a knockdown price and guaranteeing Bear Steams's shakiest assets. Bear Steams bondholders were made whole and its stockholders lost most of their money. Then came the collapse of the government-sponsored entities, Fannie Mae and Freddie Mac, both promptly nationalized. Management was replaced, shareholders badly diluted, creditors left intact but with some uncertainty. Next came Lehman Brothers, which was, of course, allowed to go bankrupt. At first, the Treasury and the Federal Reserve claimed they had allowed Lehman to fail in order to signal that recklessly managed Wall Street firms did not all come with government guarantees; but then, when chaos ensued, and people started saying that letting Lehman fail was a dumb thing to have done, they changed their story and claimed they lacked the legal authority to rescue the firm, But then a few days later A.I.G. failed, or tried to, yet was given the gift of life with enormous government loans, Washington Mutual and Wachovia promptly followed: the first was unceremoniously seized by the Treasury, wiping out both its creditors and shareholders; the second was batted around for a bit. Initially, the Treasury tried to persuade Citigroup to buy it - again at a knockdown price and with a guarantee of the bad assets. (The Bear Stearns model.) Eventually, Wachovia went to Wells Fargo, after the Internal Revenue Service jumped in and sweetened the pot with a tax subsidy. In the middle of all this, Treasury Secretary Henry M. Paulson Jr. persuaded Congress that he needed $700 billion to buy distressed assets from banks - telling the senators and representatives that if they didn't give him the money the stock market would collapse. Once handed the money, he abandoned his promised strategy, and instead of buying assets at market prices, began to overpay for preferred stocks in the banks themselves. Which is to say that he essentially began giving away billions of dollars to Citigroup, Morgan Stanley, Goldman Sachs and a few others unnaturally selected for survival. The stock market fell anyway. It's hard to know what Mr. Paulson was thinking as he never really had to explain himself, at least not in public. But the general idea appears to be that if you give the banks capital they will in turn use it to make loans in order to stimulate the economy. Never mind that if you want banks to make smart, prudent loans, you probably shouldn't give money to bankers who sunk themselves by making a lot of stupid, imprudent ones. If you want banks to re-lend the money, you need to provide them not with preferred stock, which is essentially a loan, but with tangible common equity - so that they might write off their losses, resolve their troubled assets and then begin to make new loans, something they won't be able to do until they're confident in their own balance sheets. But as it happened, the banks took the taxpayer money and just sat on it.