Newsweek article; The Case for Derivatives (Robert Shiller)

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They've been dubbed financial weapons of mass destruction, attacked for causing the financial turmoil sweeping the nation and identified as the kryptonite that brought down the global economy. Derivatives have become the universal symbol of Wall Street greed, yet few Main Streeters really know what they are—namely, financial contracts between a buyer and a seller that derive value from an underlying asset, such as a mortgage or a stock. That hasn't stopped public opinion from turning forcefully against them. Most experts believe that Barack Obama needs to put an end to the financial alchemy that turned low-quality mortgages into trillions of dollars of high-priced derivatives. There seems to be near consensus that derivatives were a source of undue risk.
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And then there's Robert Shiller. The Yale economist and financial soothsayer believes just the opposite is true. A champion of financial innovation and an expert in management of risk, Shiller contends that derivatives, far from being a problem, are actually the solution. We need more of them, not less, he says, and warns about the dangers of misguided regulation (though he agrees some regulation is vital). Shiller has an impressive track record of getting real-world things right. He published "Irrational Exuberance," which became a bestseller, just as the stock-market bubble burst in March 2000. He was eerily prescient in sounding the alarm about the housing bubble and the effects of its bursting on global financial markets.
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Derivatives, Shiller says, 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..................
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