Was too long for comments:

Ed Herman has a good short essay on the banality of evil, and how it works in more detail, here.

The premise overall, as in Arendt, seems to be that the institutions create the monsters. Once one accepts the premises of the State then everything else follows.

There is a very illustrative moment in this interview with ex-CIA analyst Michael Scheuer.

Scheuer is very critical of the Iraq War and overall US Mid-East policy, but supports rendition, black sites and torture. About four minutes in he is asked about the torture of innocents. He is very forthright that the lives of non-Americans are worthless relative to American lives, and freely admits that he believes in no universal values, but only the values of the Nation. He even invokes the duties of the work relationship saying that he was "never paid to be a citizen of the world".

It's about a clear a public display as I've seen of a man who has internalized an utter absurdity, a total fiction, and made it his touchstone for action. I don't think this attitude is uncommon even among people whose work isn't directly involved in the National Security apparatus. Indeed this is the fundamental requirement for Nationhood, that there be members and outsiders. It is ludicrous and falls apart on the slightest examination, but we are indoctrinated with it from infancy. Consider, as a mild example, every American schoolchild's compulsory recitation of the Pledge of Allegiance, a practice that is rare in European countries which have endured the horrors of Nationalism.

But I don't think that it is "just" smallmindedness, neediness, etc. which leads to these crimes. At the risk of sounding like an ideologue, or a broken record: it must be stressed that the human foibles are occuring within a framework that forces us to develop those traits and suppress other ones. The government, society and economy are all schools. And our particular schools reward greed, indifference to others, political passivity and opportunism. Our schools punish feelings of solidarity, empathy, complex communication and decision-making skills. Those latter traits must be "economized" upon in order to function and prosper within our society.

Everyone on all sides complains of the disappearance of the social fabric, the atomization and compartmentalization of daily life. But is it really so plausible to blame it on television? or secularism or some such, and not the school we are trained in every day of our waking lives? the arena that teaches us how we should make decisions and then has us repeat those decisions until they are practially muscle memory? does a professed set of conscious beliefs, or non-beliefs, really have as equal influence as the repetitions and confines we adapt to continuously moment to moment? How many times have you heard someone say, "I can't think (about all that), I got bills to pay."?

Our institutions create an artificial game in which the Golden Rule is illogical. Markets, for example, systematically reward certain types of behavior and punish other types, and the behavior that is punished is behavior that most people are inclined to view as desirable behavior. (that is until they are socialized to disdain such behavior)

This is precisely why the Liberal view that politicians are mostly empty vessels, as Digby put it:

...try to find ways to change their political calculations under the assumption that they have no real substance to begin with.

is precisely wrong. Within our framework of power, in general, a certain combination of substance in a person is required to even enter the arena of power. What's more that substance is shaped and cultivated by continued action within the framework. Obviously there are exceptions, but the general tendency is unmistakable. Indeed those with the exceptional level of character, intellect, skill and luck required to go against the grain in their institutonal role are usually held up as the inevitable "products" of the overall enterprise, further justifying it's existence.

So those "regular" traits that lead to atrocity and crime are amplified and cultivated by the framework. To leave that out is, I think, to deny the power of Arendt's observation. She pointed out explicitly that in the case of the Nazis it was the use of the legal framework that achieved the desired effect:

And just as the law in civilized countries assumes that the voice of conscience tells everybody, "Thou shalt not kill," even though man's natural desires and inclinations may at times be murderous, so the law of Hitler's land demanded that the voice of conscience tell everybody: "Thou shalt kill," although the organizers of the massacres knew full well that murder is against the normal desires and inclinations of most people. Evil in the Third Reich had lost the quality by which most people recognize it — the quality of temptation.

Our situation works a bit differently, with more emphasis on the economic, cultural and physical force, and less on the legal, but the effect is similar. "Thou shalt kill" has been the order of the day for some time in this land. Internally it is sublimated under the rubric of "competition", externally it is completely moral to kill Others. Once you've accepted the premise that the State is the only formation that can protect us from violent death, anything less than total willingness to empower the State to do so becomes a mortal danger. Hence Democrats.

So while I agree with you that it's not necessary to be Skeletor to be evil, I disagree that it simply flows from individual smallmindedness. The repetition of cartoon diabolism in the culture and the falseness of this dichotomy is itself a form of indoctrination and mystification. The repeated motif is insistence that evil must reside in each Man, and also in A Man (Hitler, Saddam, Osama), and the utter silence on the question of the evil in relations between Men. "Fantastic distractions" indeed. The Fascism in front of your face doesn't look like the Fascism in the movies so the obvious conclusion is that what you see day to day is not really Fascism.

It is even a testament to the pervasiveness and the deep inculcation of the cartoon image of evil that Arendt's observation is continually thought to be revelatory. Upton Sinclair pointed out as early as 1935 that:

It is difficult to get a man to understand something when his salary depends upon his not understanding it.

Which, although not precisely the same concept as banality of evil, points to how the daily satisfaction of the needs of a salaryman creates locked doors in the mind.