As the tide turns in financial markets, and all manner of chicanery and incompetence start to be exposed, it would be nice if some Masters of the Universe could stop confusing skill with luck.

A lot of money has been made in the past four years, some of it by shrewd investing. But some, it now appears, was amassed by participating in elaborate games of pass-the-parcel. Few players knew exactly what was in the parcels — mortgages, commercial loans, and other types of debt, with added leverage each time they changed hands — but players assumed they could guess when the music would stop. They couldn’t.

When the US sub-prime mortgage market collapsed in July, some bankers feigned surprise that anyone could have been silly enough to lend so much money to people with such poor credit histories. A few tut-tutted that dumb buyers had been tempted with teaser offers into extortionate payback rates, and were then allowed to roll the debt over and over. As if they hadn’t known.

Six weeks on, few financiers seem to realise quite how bizarre it looks to the rest of us that their industry has so totally failed to perform one of its core functions — to price risk correctly. Or how ironic it is that their practice of packaging up all sorts of debt and selling it on to hedge funds, pension funds, Uncle Tom Cobley and, increasingly, his Chinese cousins, is now a guarantee of continued market jitters. Because no one has a clue who is holding what, and they won’t know for months or even years.

Which just goes to show, I suppose, that idiocy is no more a bar to promotion in the City than anywhere else. People who complimented themselves on their brilliance at inventing ever more complex financial instruments with which to spread risk had started to act as though risk had been abolished. Whether you call it a collaterised debt obligation or a security, it’s still an IOU that someone needs to pay back.

The strange thing is that all year I have been talking to bankers who already knew that things had got way out of hand. But as one said to me yesterday: “When something is bleedin’ obvious for quite a while, and still no one does anything about it, you just go with the flow.” They knew it couldn’t last — but nor could they bear to be first to leave the party. The rating agencies who should have called time had also lost their heads and kept on giving high ratings to junk.

We have seen this before: money drives the people who deal in it to ever greater heights of delusion. Some of the newly rich seem convinced that their wealth is entirely due to their own skill, rather than (as in many cases) to following a herd that has been running in a staggeringly benign economic environment.

This gives some of them an astonishing sense of entitlement. I have been amazed to meet primary school teachers who have been bullied by parents who are bankers yelling “Don’t you know who I am?” while threatening to remove little Archie unless he gets a bigger role in the school play. I have met financiers who boast about how little they pay their cleaners and housekeepers, apparently believing that they are uniquely entitled to exploit those whose poverty self-evidently makes them less deserving.

This disease is by no means confined to financiers, nor does it affect all of them. But one of my friends is avidly watching her banker neighbour excavate a tiny basement flat under his £3 million house, in which he intends to install a Filipina nanny. It doesn’t even have windows.

I cannot imagine Warren Buffett, one of the world’s shrewdest investors, bullying a school teacher. Nor forgetting for one moment to credit his good luck. Four years ago he cautioned that a credit bubble was coming and that credit derivatives were “weapons of financial mass destruction”. That may prove to be an exaggeration. But he didn’t mutter it to himself in the bath; he shared his beliefs in the papers. Anyone who ignored him then deserves everything they get now. A shake-out is surely the only way to purge the markets of chicanery.

There is no sign yet that these financial wobbles will bring on recession. But central banks are still loath to let any one institution go to the wall when all are so closely linked. They fear a chain reaction. In the crazy world of modern finance, almost everyone is counterparty to someone else’s trade. This blurring of lines is epitomised by this week’s troubles at State Street, the US bank that has suddenly declared it has about $22 billion of exposure to potentially bad loans in investment “vehicles” similar to those that almost brought down two German banks two weeks ago (before they were bailed out by the German taxpayer). “No one knows what’s in any of these loan packages,” an investment analyst stated this week. Nor, until this week, did anyone know that they amounted to anything like $22 billion. So the world’s largest institutional money manager isn’t sure what is on its books. Does it feel just a little bit humble?

I don’t know much about high finance. But I am beginning to fear that nor do some of its high priests. Their unintelligible speech and frightening jargon is, after all, no guarantee of genius. We need common sense, and the right way to restore it is through market corrections, not heavy-handed regulation. Of course I relish the Schadenfreude of writing this: but we really do need more honesty about where mistakes have been made. Financiers turn out to be just as flawed as the rest of us. If they could just admit that, we might be able to feel sorry for them.

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