'What an ideology is, is a conceptual framework with the way people deal with reality," Alan Greenspan told the Congressional House oversight and government reform committee on 23 October. "Everyone has one. You have to - to exist, you need an ideology. The question is whether it is accurate or not." As the former chairman of the Federal Reserve, from 1987 to 2006, Greenspan stood at the helm of US monetary policy during the time conditions for the current meltdown were being created.

"And what I'm saying to you," he continued, "is, yes, I found a flaw. I don't know how significant or permanent it is, but I've been very distressed by that fact ... [I found a] flaw in the model that I perceived is the critical functioning structure that defines how the world works."

Greenspan's ideology was unfettered, free-market capitalism. Its understanding of how the world works was rooted in self-interest. It was a value system that placed the private before the public, the individual before the collective, and the wealth of the few before the welfare of the many.

So pervasive was this worldview that, after a while, it was not even understood to be a view at all. It was just the hard-nosed reality against which only lunatics and leftists raged. "Unlike many economists," Bob Woodward wrote of Alan Greenspan in his book Maestro (the title speaks volumes), "he has never been rule driven or theory driven. The data drive." They drove a sleek black limousine over the edge of a steep cliff. And since the invisible hand of the market ostensibly guided everything, there was no one who could really be held accountable or responsible for anything. The buck didn't stop anywhere. Indeed, for those who were already wealthy, the bucks just kept rolling in.

But the flaw in Greenspan's ideology did not just govern finance - it infected all spheres of human relations, including politics. "This process has become a great deal about money. A lot of money," said Tom Vilsack (whom Barack Obama has just picked as his agriculture secretary), as he withdrew from the Democratic primaries almost a full year before a vote had been cast. "So it is money, and only money, that is the reason why we are leaving today."

A poll released by Judicial Watch the day before Greenspan testified revealed that almost two-thirds of Americans "strongly agree" with the statement that political corruption played a big role in the US's recent financial crisis. A further 19% said they "somewhat agree".

The two most prominent scandals in recent weeks illustrate how the line between what is unethical and what is illegal in politics, and what is reckless and what is fraudulent in finance, has been so blurred as to have erased much in the way of meaningful distinction. Credibility in public life, like Greenspan's ideology and the stock prices it relied on, is in freefall.

The first scandal is the demise of Bernard Madoff, who was arrested after he confessed to defrauding investors of about $50bn in an elaborate, global Ponzi scheme. Madoff's alleged transgression went beyond just the financial. A pillar of the Jewish and financial communities, he traded on trust.

"In an era of faceless organisations owned by other equally faceless organisations," said his firm's website. "Bernard L Madoff Investment Securities LLC harks back to an earlier era in the financial world: the owner's name is on the door." Investors had to be recommended by friends - the exclusivity made it attractive - and the returns were constantly excellent. Madoff paid out about 15% a year, regardless of what the market was doing. In Palm Beach, Florida, people joined the Country Club and the golf club just so they could meet him. They virtually begged him to take their money. The roll call of the swindled is illustrious: Steven Spielberg, Jeffrey Katzenberg, author and humanitarian Elie Wiesel, New Jersey Senator Frank Lautenberg, and the New York Daily News' publisher, Mortimer Zuckerman. It was as though America's rich and famous had succumbed to a huge online scam.

The level of returns seemed too good to be true, and it was. But the sense of entitlement the wealthy have to even more wealth is just too entrenched to bother with truth. In a heartbeat, generations of savings and entire charities have been extinguished.

The second scandal concerns the foul-mouthed Democratic governor of Illinois, Rod Blagojevich, who has the right to appoint a successor to the Senate seat left vacant by Obama. He was arrested after federal wiretaps allegedly revealed he was poised to sell the seat to the highest bidder. The day after the election, as at least half of the nation basked in the warm glow of Obama's victory, Blagojevich, it seems, was trying to line his pockets. He told one aide: "I've got this thing and it's fucking golden, and, uh, uh, I'm just not giving it up for fucking nothing. I'm not gonna do it."

Suggestions that both men must have been seized by psychological disorders do not seem outlandish. Particularly Blagojevich, who has been under at least a dozen federal investigations since 2005 and knew he was being wiretapped. But far more worrying is the greater likelihood that they are entirely sane and rational. Blagojevich may be crude and sociopathic, and Madoff socially manipulative. Their actions may have violated the letter of the law. But they were consistent with the spirit of the ideology that has governed American life for at least a generation.

Blagojevich did not invent the notion that wealth and political influence go hand in hand. Had he been more patient, the lobbying deals and board memberships that routinely come after political office would have come his way. And anyone seeking a seat would have to show they could pay their way. Indeed, the New York governor, David Patterson, seems set to hand over Hillary Clinton's Senate seat to Caroline Kennedy at least in part because Kennedy can raise vast sums of money for a run in 2010. Unlike Blagojevich, Patterson is not looking to benefit from it personally. But no one is expecting him to end up in the poorhouse when his term is done.

As for Madoff, if the Securities and Exchange Commission, the financial services watchdog, had been doing its job, it could have prevented him from committing this crime. But if he had done it by the book, an analogous situation could have occurred that would have left his investors almost as broke. His fraud was exposed after some investors sought to withdraw more capital than he could produce. That is essentially the same as the bank runs we have seen over the last few months. But while Madoff is under house arrest, the bankers are about to reap huge bonuses.

When a political system where you have to pay to play meets a financial system run like a giant Ponzi scheme, widespread criminality, corruption and calamity are the only feasible outcomes. The only remaining questions then are what society is prepared to excuse, accountants are able to write off or lawyers are able to defend. "It is easier to rob by setting up a bank," argued the German playwright Bertolt Brecht, "than by holding up a bank clerk."

g.younge@theguardian.com