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Fareed Zakaria talked to author of Liars Poker, Michael Lewis, about what the future is for Wall Street and the economy, and Lewis is not optomistic due to the revolving door between our government and the financial sector.

ZAKARIA: And we are back with Michael Lewis.

Michael, there are sort of two views on the future of Wall Street. One is, this whole game is over. And sort of, to a certain extent, you've been expressing it a little bit, that, you know, this is a 30-year boom. We're going to look back it the way we did the 1920s, maybe the 1890s.

But there's another view that says there are so many smart people out there, and they are so hungry, and they desperately want to find ways to make money, that you're going to actually see new and interesting ways that these firms will either produce money, or there'll be a whole series of smaller firms -- you know, risk-taking firms like hedge funds on the one side, much more staid banks on the other.

What do you think? What does your gut tell you the future of Wall Street is going to look like?

LEWIS: I think that we are in for another day of reckoning down the road. I just don't know when it is.

I think that they haven't even properly evaluated the institutions. They haven't been honest about what these institutions have on their books. They've had phony stress tests.

So, we're in a kind of, I think, right now, in a period where there's a false sense that it's over, that the crisis is passed. I don't think the crisis is passed.

Now, they haven't all deleveraged. Morgan Stanley did, to its chagrin. But everybody else is still running these huge -- a huge amount of leverage. But that's going to change. I think the general sense that this sort of risk-taking should not take place in a public corporation, especially one that's too big to fail, will express itself in regulation that will prevent it from happening.

But you're right. There are all these smart people. And they're used to making huge sums of money. And it's kind of hard to believe that that will just end.

I don't think it will just end. I think it will find a different expression. I think that what you'll see is hedge funds will become more and more interesting.

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Our leaders have framed the problem as a “crisis of confidence” but what they actually seem to mean is “please pay no attention to the problems we are failing to address.” - Michael Lewis

In today's New York Times, Michael Lewis, author of "Liar's Poker" and "Panic: The Story of Modern Financial Insanity", looks at the systemic intertwined interests (like the don't-rock-the-boat SEC) that kept Wall St. embroiled in such questionable and risky practices. As just one example among many, he points to the man who tried to stop Bernie Madoff for years:

... 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 be anything other than a fraud. Mr. Madoff’s 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. Madoff’s 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.

Of course, Madoff was a relatively small part of the culture:

The American International Group, Fannie Mae, Freddie Mac, General Electric and the municipal bond guarantors Ambac Financial and MBIA all had triple-A ratings. (G.E. still does!) Large investment banks like Lehman and Merrill Lynch all had solid investment grade ratings. It’s almost as if the higher the rating of a financial institution, the more likely it was to contribute to financial catastrophe. But of course all these big financial companies fueled the creation of the credit products that in turn fueled the revenues of Moody’s and Standard & Poor’s.

These oligopolies, which are actually sanctioned by the S.E.C., didn’t merely do their jobs badly. They didn’t simply miss a few calls here and there. In pursuit of their own short-term earnings, they did exactly the opposite of what they were meant to do: rather than expose financial risk they systematically disguised it.

This is a fascinating piece, with lots of advice about what needs to be fixed to restore confidence in the financial system. (As you may have guessed, nothing substantive has been done yet.) Go read the rest.