What led to the point where political leaders say we needed a $700 billion bailout to prevent financial apocalypse? The easy answer is the subprime mess. But to dig deeper is to see that the subprime mess is merely a symptom of the root problem: financial innovation.

Financial innovation is often cited as a catalyst for economic growth. But one thing is becoming more clear: The instruments of financial innovation that have recently dominated Wall Street -- mortgage-backed securities, credit default swaps, and other "derivatives" -- are exceedingly complex (resulting in overreliance on credit rating agencies), do not create new value (but merely repackage existing value to capture larger gains for the financial product's buyer or seller), and are often built on flawed financial models.

A good example is found in the securitization of subprime loans. Wall Street's ability to securitize subprime loans (i.e., pool, repackage, and sell derivatives based on them) allowed originating lenders to unload loans as soon as they were made.

As a result, lenders made risky loans to individuals with below-average credit ratings. This was a win-win for lenders.

Not only did they receive origination fees and payment for each loan that was sold to Wall Street firms, but they also passed along the risk of default. Lenders did not care if borrowers would be able to make their mortgage payments in the future, because the risk of default was passed on to others.

Initially, Wall Street firms were able to securitize these same loans and sell at least a portion of them to other investors -- again receiving payment while passing the risk of default on down the line, amounting to a dangerous game of "hot potato."

Arguably no new value was created, yet financial innovators profited. The fundamental flaw in this financial innovation was that the lenders -- the only ones who could judge the creditworthiness of borrowers -- had no incentive to do so.

As a result, Wall Street firms and derivative purchasers have been left holding large amounts of bad debt. Headline-grabbing failures have followed.

Broad shifts in the U.S. economy over the past several decades have worked in tandem with financial innovation, resulting in a significant increase in the service industries (including financial services) and a significant decrease in the manufacturing industries.

With other countries (most notably China) taking the lead in manufacturing, and with the current crisis revealing the financial services industry to be a house of cards, the United States no longer can afford to devote so much of its capital to financial innovation.

Instead, we must redirect our entrepreneurial spirit toward true, value-producing innovations.

The creation of new information technologies and clean technologies in Silicon Valley, new biotechnologies in Madison, and other science and engineering-based innovations must be our focus. We have seen enough financial innovation to last a while."

Ibrahim is an assistant law professor at UW-Madison Law School.