When news broke last week that Wall Street investment wiz Bernard Madoff allegedly admitted to a $50 billion Ponzi scheme, it left me wondering how he managed to do this without alerting regulators.

This week, we found out that there were classic warning signs that the SEC admitted it should have acted upon. Well now, Nobel Laureate economist Paul Krugman says that Madoff's fraud is evidence of a systemic defect in our financial system — vast riches for those who managed other people's money has had a corrupting effect on American society.

For more on this, including an excerpt from Krugman's piece, read more. Krugman explains:

Consider the hypothetical example of a money manager who leverages up his clients’ money with lots of debt, then invests the bulked-up total in high-yielding but risky assets, such as dubious mortgage-backed securities. For a while — say, as long as a housing bubble continues to inflate — he (it’s almost always a he) will make big profits and receive big bonuses. Then, when the bubble bursts and his investments turn into toxic waste, his investors will lose big — but he’ll keep those bonuses.

O.K., maybe my example wasn’t hypothetical after all.

So, how different is what Wall Street in general did from the Madoff affair? Well, Mr. Madoff allegedly skipped a few steps, simply stealing his clients’ money rather than collecting big fees while exposing investors to risks they didn’t understand. And while Mr. Madoff was apparently a self-conscious fraud, many people on Wall Street believed their own hype. Still, the end result was the same (except for the house arrest): the money managers got rich; the investors saw their money disappear.

Krugman's powerful piece goes on to lament the fact that many of the nation's best and brightest have been lured to Wall Street, instead of going into public service or science.

Do you think there's a difference between what Madoff did and what typically happens on Wall Street?

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