How could this happen? That question has dominated the business world as the staggering Ponzi scheme masterminded by New York’s Bernie Madoff has come to light. How could the Securities and Exchange Commission have ignored repeated warning signs—again? How could some of the savviest investors and institutions have been duped? How could Madoff’s own family not have seen this coming?

It has become a theme of this economic crisis: Time and again, things that should have registered as enormous red flags were overlooked, and systems broke down.

Much has been made of the role greed and hubris have played in the meltdown and the scandals that have followed. But there’s something more at fault: the “You just don’t get it” ethos that dominated Wall Street in this era of derivatives, an arrogance that silenced investors who might have otherwise asked the right questions.

In recent weeks, we have been deluged with comments and emails in response to “The End,” our December/January cover story by Michael Lewis that examines the roots of the crisis through hedge fund manager Steve Eisman. Reaction to the piece has been sobering. Along with offering praise for the story’s clarity, people in the highest positions on Wall Street have told us, on the sly, that they didn’t really understand the arcane world of newfangled financial instruments themselves.

And that is a scary thing indeed. The fact that executives responsible for overseeing millions—sometimes billions—of dollars in investments didn’t grasp what was going on in the markets or even within their own companies is one of the threads of this crisis. Somehow, the people who invented the opaque derivatives and ridiculous subprime securities and Alt-A mortgages managed to convince many of the rest of us that they were smarter than we were, and if we didn’t understand how it all worked, well, too bad for us.

It happened again in the Madoff case. Yes, investors said, his amazingly consistent returns in a terrible economy seemed too good to be true. But who wants to question Steven Spielberg and the lions of the Palm Beach Country Club?

In this economy, the spoils will now go to those who followed the simplest rules of investing: Put your money only in what you know. Diversify your holdings. Demand proof of anything that seems suspect.

Hedge fund manager John Paulson, profiled by Gary Weiss, has followed that wisdom to great success. Paulson, whose $3.7 billion payday in 2007 has made him a target of the hedge fund smackdown, tells Weiss that he began to bet against Wall Street’s banks when he realized that they had no idea what was on their own balance sheets. That instinct has paid off big, though even investors in Paulson’s fund would be wise to keep his gains in perspective. Nobody’s good fortune lasts forever.

Though it’s an unsettling moment for business, the bad times have to end eventually. Condé Nast Portfolio contributing editor John Cassidy, a longtime pessimist, comes out in this month’s Economics column as a bit—just a bit—of a closet optimist. So there may be hope after all.

There is also redemption in the Madoff story and in the fall of Wall Street. No longer do we have to accept the notion that if we don’t understand something, we’re just too dumb to figure it out. Maybe we knew better all along.