Chapter 1 The Naked Emperors Now see the sad fruits your faults produced, Feel the blows you have yourselves induced. -- Racine America feels broken. Over the last decade, a nation accustomed to greatness and progress has had to reconcile itself to an economy that seems to be lurching backward. From 1999 to 2010, median household income in real dollars fell by 7 percent. More Americans are downwardly mobile than at any time in recent memory. In poll after poll, overwhelming majorities of Americans say the country is "on the wrong track." And optimism that today''s young people will have a better life than their parents is at the lowest level since pollsters started asking that question in the early 1980s. It is possible that by the time this book is in your hands, these trends will have reversed themselves.

But given the arc of the past decade and the institutional dysfunction that underlies our current extended crisis, even a welcome bout of economic growth won''t undo the deep unease that now grips the nation. The effects of our great disillusionment are typically measured within the cramped confines of the news cycle: how they impact the President''s approval rating, which political party they benefit and which they hurt. Most of us come to see the nation''s problems either as the result of the policies favored by those who occupy the opposite end of the ideological spectrum, or as an outgrowth of political dysfunction: of gridlock, "bickering," and the increasing polarization among both the electorate and the representatives it elects. But the core experience of the last decade isn''t just political dysfunction. It''s something much deeper and more existentially disruptive: the near total failure of each pillar institution of our society. The financial crisis and the grinding, prolonged economic immiseration it has precipitated are just the most recent instances of elite failure, the latest in an uninterrupted cascade of corruption and incompetence. If that sounds excessively bleak, take a moment to consider America''s trajectory over the first decade of the twenty-first century. The Supreme Court--an institution that embodies an ideal of pure, dispassionate, elite cogitation--handed the presidency to the favored choice of a slim, five-person majority in a ruling whose legal logic was so tortured the court itself announced it could not be used as precedent.

Then the American security apparatus, the largest in the world, failed to prevent nineteen men with knives and box cutters from pulling off the greatest mass murder in U.S. history. That single act inaugurated the longest period of war in the nation''s history. Just a few months later Enron and Arthur Andersen imploded, done in by a termitic infestation of deceit that gnawed through their very foundations. At the time, Enron was the largest corporate bankruptcy in the history of the nation, since eclipsed, of course, by the carnage of the financial crisis. What was once the hottest company in America was revealed to be an elaborate fraud, aided and abetted by one of the most trusted accounting firms in the entire world. And just as Enron was beginning to be sold off for scraps in bankruptcy court, and President Bush''s close personal connection to the company''s CEO, Ken Lay, was making headlines, the Iraq disaster began.

Iraq would cost the lives of almost 4,500 Americans and 100,000-plus Iraqis, and $800 billion, burned like oil fires in the desert. The steady stream of grisly images out of the Middle East was only interrupted, in 2005, by the shocking spectacle of a major American city drowning while the nation watched, helpless. As the decade of war dragged on, the housing bubble began to pop, ultimately bringing about the worst financial panic in eighty years. In the wake of the bankruptcy of Lehman Brothers in September 2008, it seemed possible that the U.S. financial system as a whole would cease to operate: a financial blackout that would render paychecks, credit cards, and ATMs useless. In those frenzied days, I watched Federal Reserve chairman Ben Bernanke and Treasury secretary Hank Paulson defend their three-page proposal for a Troubled Asset Relief Program (TARP) in front of a packed and rowdy Senate hearing room. When pressed on the details by members of the Senate Banking Committee, Bernanke and Paulson were squirrelly.

They couldn''t seem to explain how and why they''d arrived at the number they had (one Treasury staffer would tell a reporter it was plucked more or less at random because they needed "a really big number"). Watching them, I couldn''t shake a feeling in the pit of my stomach that either these men had no idea what they were talking about or they were intentionally obfuscating because they did not want their true purpose known. These were the guys in charge, the ones tasked with rescuing the entire global financial system, and nothing about their vague and contradictory answers to simple questions projected competence or good faith. I saw in an instant, with no small amount of fear, that the emperor truly had no clothes. Washington managed to pass the bailout for the financial sector, and while Wall Street would soon return to glory, wealth, and profitability, the rest of us would, come to learn in gruesome detail all the ways in which the source of its prosperity had, in fact, been the largest Ponzi scheme in the history of human civilization. The cumulative effect of these scandals and failures is an inescapable national mood of exhaustion, frustration, and betrayal. At the polls, we see it in the restless, serial discontent that defines the current political moment. The last three elections, beginning in 2006, have operated as sequential backlashes.

In 2006 and 2008, Democrats were able to point to the horrifyingly inept response to Katrina, the bloody, costly quagmire in Iraq, and, finally, the teetering and collapsing economy. In 2010, Republicans could point to the worst unemployment rate in nearly thirty years--and long-term unemployment rates that rivaled those of the Great Depression--and present themselves as the solution. Surveying the results of the 2010 midterms on election night, Tom Brokaw alluded to the collapse of trust in institutions in the wake of a war based on lies and a financial bubble that went bust. "Almost nothing is going the way that most people have been told that it will. And every time they''re told in Washington that they have it figured out, it turns out not to be true." At a press conference the day after Democrats faced a "shellacking" in the 2010 midterm elections, Barack Obama recounted the story of meeting a voter who asked him if there was hope of returning to a "healthy legislative process, so as I strap on the boots again tomorrow, I know that you guys got it under control? It''s hard to have faith in that right now." And who could blame him? From the American intelligence apparatus to financial regulators, government failures make up one of the most dispiriting throughlines of the crisis decade. As citizens of the world''s richest country, we expend little energy worrying about the millions of vital yet mundane functions our government undertakes.

Roads are built, sewer systems maintained, mail delivered. We aren''t preoccupied by the thought that skyscrapers will come crashing down because of unenforced building codes; we don''t fret that our nuclear arsenal will fall into the wrong hands, or dread that the tax collector will hit us up for a bribe. It is precisely because of our expectation of routine competence that government failure is so destabilizing. "We''ve created this situation where we''ve created so much mistrust in government," Ivor van Heerden told me one night in a seafood restaurant in the coastal town of Houma, Louisiana. For years van Heerden was deputy director of the LSU Hurricane Center, which issued a series of dire warnings about the insufficiencies of the levee system in the run-up to Katrina. After the storm, van Heerden was fired by LSU, because, he suspects, he was so outspoken in his criticism of the Army Corps of Engineers. "You have these politicians that are selling this mistrust," he said in reference to the ceaseless rhetoric from conservatives about government''s inevitable incompetence. "And the federal government sure as hell hasn''t helped.

" And yet the private sector has fared no better: from the popping of the tech bubble, to Enron, WorldCom, and Global Crossing, to the Big Three automakers, to Lehman Brothers, subprime, credit default swaps, and Bernie Madoff, the overwhelming story of the private sector in the last decade has been perverse incentives, blinkered groupthink, deception, fraud, opacity, and disaster. So comprehensive and destructive are these failures that even those ideologically disposed to view big business in the best light have had to confront them. "I''ve always defended corporations," a Utah Tea Party organizer named Susan Southwick told me. "''Of course they wouldn''t do anything they knew was harming people; you guys are crazy.'' But maybe I''m the crazy one who didn''t see it." The dysfunction revealed by the crisis decade extends even past the government and the Fortune 500. The Catholic Church was exposed for its systematic policy of protecting serial child rapists and enabling them to victimize children. Penn State University was forced to fire its beloved football coach--and the university president--after it was revealed that much of the school''s sports and administrative hierarchy had looked the other way while former assistant football coach Jerry Sandusky al.