Must Read Article - Deconstructing Today's Ongoing Revolution In Finance

This article is from the always excellent John Mauldin, by Woody Brock.

Some of the better quotes:

...yes, there is a theoretically optimal value of contracts that ideally "should" exist: Incredibly, it is a number millions of times larger than today's value...This being true, the number of securities now in existence is a mere drop in the bucket of what is required for true economic efficiency to be reached.

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Their impact far transcends the kinds of securities that are now created and traded, and is permitting new solutions to a broad array of financial and economic problems. As one example, our new found ability to securitize and repackage assets and to slice and dice risk has led to a complete reconceptualization and utilization of leverage.

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Even more fundamentally, without a complete set of hedging markets in which all agents can hedge all risks, the Invisible Hand of the market will fail to achieve an efficient allocation of all resources--commodities, services, and risk. This is Arrow's main theorem. In brief, if you believe in capitalism, in markets, and in the Invisible Hand, then you had better sing the praises of today's revolution in finance. For it has brought us closer than ever before to the idealized economy of the text book.