The current financial crisis calls for a better investment mechanism. The stock market serves dual useful purposes: to provide capital to worthy entrepreneurial endeavors, and to allow investors to save in a way that does not lose real value over time and partake in, and benefit from, value-generating entrepreneurial endeavors. Yet the current common financial instruments of equity have a severe shortcoming: they are prone to speculation and bubbles. And while a few economists maintain that bubbles are good by creating a mechanism to create appreciation of savings in the absence of true value creation, I don't subscribe to that theory; there are plenty of ways to save, and the burst of bubbles causes jobs to be lost, people to go hungry and lives to be lost. Is there a way to achieve the purposes above without the downside of bubbles?

A solution occurred to me during lunch at an Asturian restaurant in Madrid with my friend and fellow MIT alum, economist Fernando Broner, from the Centre de Recerca en Economia Internacional of the Universitat Pompeu Fabra in Barcelona, where we went after I picked him up at the Banco España, Spain's Central Bank. Fernando calls my idea contingent bonds. Here is the jist of it: the instrument, which has a maturity date, gives the instrument's holders the right to a fraction of a company's profits for the period until the instrument's maturity. The security is originally sold by the company to raise cash, but can be traded in secondary markets.

Contingent bonds have several desirable properties. Speculation and bubbles are largely eliminated, because the instrument's value is tied to the actual profits of the company during a given period rather than from speculation of the security's value upon a sale. Indeed, the instrument becomes worthless after maturity --whether the instruments pays off at maturity or in regular intervals until then. It still allows the most promising companies to receive the most investment. It allows start-ups to receive investment, as contingent bonds can have different maturities. Their price can be determined by open markets, demand based on investors' expectation of profit and supply by companies' demand for cash. Some related instruments exist in the marketplace today. For example, SHORT TERM STRUCTURED FIXED RATE EXCHANGEABLE CORPORATE SECURITIES give a fixed yield in the event the stock does not depreciate, and common stock otherwise. But those instruments do not have the variable yield provided by equity that allows investors to truly share in the rewards of spectacular success. I believe contingent bonds can fill that void, and restore the world's confidence in corporate investments.