FEATURE: "The Case for Derivatives: Economist Robert Shiller believes they could help solve the crisis," by Zachary Karabell, Newsweek, 2 February 2009.

The bonus thing is driving Washington and the populace rather nutty, and it should. Bubble earnings through the first three quarters were effectively erased by the disastrous fourth quarter, so yeah, you eat what you kill but you suffer the outcomes your tribe as a whole delivered.

But I remain totally serious in Great Powers when I say, "thank God for those whiz kids on Wall Street." Developing ever more complex and sophisticated risk instruments is a very good thing for this massive entity we call the global economy, and if America isn't taking that lead, who will?

Do we make mistakes along the way? Geez, that's the entire history of finance in America--finding new ways to create bubbles amid real booms by working around the rules already in place. You want advance? Then live with experimentation.

So right now there's a lot of toss-the-baby-out-with-the-bathwater thinking regarding derivatives, but that's a mistake, says Mr. Irrational Exuberance himself, Robert Shiller (Yale economist):

Derivatives, says Shiller, are merely a risk-management tool the same way insurance is. "You pay a premium and if an event happens, you get a payment." That tool can be used well or, as happened recently, used badly. Shiller warns that banishing the tool gets us nowhere. Instead, he envisions a world where derivatives become as common as cash.

What separates Shiller from the majority of economists is his lack of faith in the "efficient-market hypothesis," That belief, which also guides the hand of most money managers, holds that the market will price assets according to their fundamental value and that those prices reflect all pertinent information. Shiller instead follows those, like John Kenneth Galbraith, who hold that market prices reflect "animal spirits" and popular passions, not perfect information. That is why bubbles form, and that, for Shiller, is why financial innovation, and not just government regulation, is imperative.

Smart stuff.

To me, innovations don't go away. They just get better regulated. Investment banks are a good example: we lose all the biggies in the crash but that doesn't equal the end of investment banking--just those behemoths. Already you see all sorts of smart money articles about the coming rise of "boutique investment houses."

In many ways, what Enterra's doing in Kurdish Iraq is acting like an investment bank--a very specific version of a boutique firm. You look at globalization's continued advance into new regions, and you have to come to the conclusion that this function is now needed more than ever, no matter what the Wall Street Five did to end their own historic run there.