If you read only one column this weekend, read Paul Krugman’s column about the lessons from the Bernard Madoff fraud in Friday’s  New York Times. (Here’s the link)

Madoff was a bastion of the New York financial world. Krugman notes that he a “brilliant investor (or so almost everyone thought), philanthropist, pillar of the community”.

The op-ed columnist then lists a hitherto undiscovered trait. He was also a phoney.

And a massive one. His huge investment scheme, with a worth of a reported $50 billion, was a Ponzi scheme; in other words an elaborate and outrageous pyramid scheme, the Taj Mahal of houses of cards and frauds. It was a little the smooth-talking Irish financial adviser Breifne O’Brien seemed to be doing. But on a vast scale. The extent of the fraud… Ireland’s annual income for 2009, and then some.

Warren Buffett once said that it is only when the tide goes out that you realise who is exposed as naked and who is not.

And the annihilation of the world financial markets seems to have exposed more brutally exposed flesh among the financial elite than a lifetime of Lucien Freud portraits.

Sure what Madoff did was crooked, but Krugman observes acidly that all he did was skip a few steps. Granted, he is being slightly facetious. But the point is the same.  The net take was almost the same for those geniuses who worked on Wall Street as it was for Maddoff.  The fraudster simply dispensed with the pretence of fooling himself that the investment was actually being really earned.

The Byzantine make-up of the money markets – with its ultra-complicated derivatives and derivatives backing derivatives – is as easy to understand and explain as the Black Hole and quantum physice.

But while the models got complicated the purpose and motivation were both very simple concepts indeed.

The purpose was to cover up the tracks. The game became so elaborate and so elongated and so multi-faceted that too few realised that the original track led nowhere.

And the motivation? Greed, pure and simple. Not just that of the Masters of the Universe. The virus spread much wider than that, affected us all. We ignored the lessons of history, of all the previous bubbles. We thought that this time that share prices would rise into the infinite futures, that economies would continue to expand, that this cycle would never really come to – what’s the phrase – yes, a shuddering halt.

Krugman is worth quoting a little here:

“We’re talking about a lot of money here. In recent years the finance sector accounted for 8 percent of America’s G.D.P., up from less than 5 percent a generation earlier. If that extra 3 percent was money for nothing — and it probably was — we’re talking about $400 billion a year in waste, fraud and abuse.

But the costs of America’s Ponzi era surely went beyond the direct waste of dollars and cents.

At the crudest level, Wall Street’s ill-gotten gains corrupted and continue to corrupt politics, in a nicely bipartisan way…

Meanwhile, how much has our nation’s future been damaged by the magnetic pull of quick personal wealth, which for years has drawn many of our best and brightest young people into investment banking, at the expense of science, public service and just about everything else?

Most of all, the vast riches being earned — or maybe that should be “earned” — in our bloated financial industry undermined our sense of reality and degraded our judgment.”

Brian Cowen and his Government took a battering when they unveiled the economic recovery plan this week. Cowen has had a torrid first six months as Taoiseach. He has been a very unlucky General. Bertie Ahern dealt him the worst possible hand as he himself finally took lead of the table. And with that lousy hand, Cowen has gone ‘all in’ in the forlorn hope that somehow it can keep them there.

Some of it is of his own doing. He has been indecisive. That has not been surprising to me. A lot of people over the years have confused his style with his record. His style may be rambunctious but his decisions have always been ultra-conservative and have tended to come after a lot of humming and hawing.

He gave us 100 pages on Thursday. But all he needed to give was three words: public pay cuts.

But the Government must be given some credit for trying and for a first effort at creative and imaginative thinking. My impression is that Cowen has wanted to be a thoughtful and quietly revolutionary Taoiseach in the mould of Lemass but has been so mired in crisis management that he’s found it impossible to do so. He wanted to become Taoiseach maybe at the end of 2009 but that was not to be. Already, niggling questions are being asked will he last until the end of the year?

And the opposition needn’t bay so loudly either. Look at their preposterous proposals on stamp duty that would have made the property bubble splat even more spectacularly. In the run-up to the 2007 election, all the main parties conformed and toed the line in their own way on low taxes and on property incentives. Everybody parrotted on about 4 per cent growth and possible soft landings. They either didn’t see the tidal wave. Or refused to recognise it as a tidal wave.

There were a couple of dissenting voices out there saying that it was all overheating dangerously but nobody was brave enough to shout stop.

And we, the people, were complicit.too. We are not passive. We must take the share of the blame for believing that our earnings would increase exponentially, that our houses would continue to rise in value, that the huge credit card and other debts that we were building up could somehow be magicked away by our vast earning potential sometime in the future. All of our calculations and wisdom was all predicated not on tangible things or products or service. But on the intangibles like confidence, hope, optimism and day-dreaming.

Sure the Government doesn’t need to shoulder all of the blame. A lot of what is happening was indeed outside its control But now, politically, the Government needs to be decisive and to dole out the tough medicine. That means a couple of hard and unpopular decisions. Cowen says he’s not afraid of doing that. So let’s see him do it.

But that in itself will not be enough.

Freezing public pay will save half a billion euro. Even cutting public sector pay will not solve the problem.

Put simply, Irish society is not as wealthy or as rich as we all believe it to be. To use the immortal words of CJH, we are living beyond our means.

The implications are obvious. We will have to cut our cloth to suit our measure. And nobody quite knows yet how awful and painful and bracing that is going to be.

Fógra: Senator Joe O’Toole has a new podcast reflecting on his political week which you can access here. We will make a tecchie geek out of him yet!