I have always believed that the vast majority of today's financial instruments have been invented out of thin air for no reason other than to ultimately ensure the employment of bankers and brokers.
Bzzzzz! Wrong. Every financial instrument out there is there for one reason, and one reason only, someone was interested in buying it. The problems we are in today are not with the tools, the tools functioned exactly like they were supposed to. The problem is that everyone, E-V-E-R-Y-O-N-E was too busy or too lazy to read the manual for the tool. When I say "everyone" I mean the subprime borrowers who should have understood their mortgage agreement, I mean the loan originator who should have known the borrower couldn't conceivably repay, I mean the credit rating agency who didn't do their due diligence on their AAA-rated security, I mean the banker who bought the mortgage-backed security and blindly trusted the rating agency, I mean underwriters of CDSes who didn't do their due diligence in so many ways, I mean the legislators that told Fannie and Freddie to get more people to own houses no matter what, I mean the people who bought shares in financial companies who didn't realize the valuations were completely unsustainable.
A couple of examples in what I'm sure you would call "invented" financial instruments
The mortgage-backed security (MBS) that is blamed most often for this crisis did exactly as intended. This security is perfectly useful, someone said, hey, for the most part a mortgage is a bond, why don't we treat them like it. The problem is that an individual mortgage might not be repaid, but if you pool a bunch of similar mortgages together, you can get a pretty good idea of what percentage will fail. Now, you slice this pool up and sell the puddles. Now people who never could offer a mortgage before because they didn't have the money to lend for a whole house, or couldn't put all their eggs in one basket can essentially sell mortgages and be pretty confident about their risk and return. What went wrong is that the mortgage originators didn't assess the borrowers suitability properly, the rating agency that rated the MBS didn't check the originator's work, and the buyer of the security didn't bother to check the rating agencies work.
How about credit default swaps (CDS)? Paul borrows $1000 from you, and you're pretty sure that Paul will pay all of it back in a year, but you have to have at least $900 to pay for a new liver (you drunk!) in a year. Now, I say, hey, for $5 a month, I'll pay you the difference between the $1000 and what Paul pays you, just in case he doesn't pay you back. This is a great deal for you, because no matter what you get your new liver, and if Paul does pay you back, you get $940. Sound familiar, that's right, this is just insurance with a fancy name! I'm sure you'd agree that insurance wasn't just 'invented out of this air'. The problem was in this case that I didn't assess correctly that Paul was just developing a coke habit and would skip to the Caymans after two months. Now with home insurance, companies can assess the risk very well, because they have a lot of historical data and a big sample size. The risk of default on corporate debt is a lot more complex and has less historical data, and many writing the CDSes (yeah, I'm looking at you AIG) were way off in their assessments.
Bankers are a fun target because they're generally rich and got that way because they happen to like the soulless task of combing through countless spreadsheets and schmoozing clients until they're both too drunk to see, but there's plenty of blame to go around in this mess. The great thing about free market capitalism is that no one is forcing you to do anything. If you were a good little, risk averse, worker ant for the last 15 years you should be very happy right now. You should have plenty of cash and can get a house, a car, and a new wardrobe at a huge discount. You can sit back and buy that prick banker's Manhattan flat for 50% off and laugh harder when you sell it back to him for three times that in 8 years when he's got cash again. If, on the other hand, you are all pissed off because your option ARM just reset and now your Citigroup stock is worth 10% of what it was, you have no one to blame but yourself.
Remember -- only 10% of anything can be in the top 10%.