NEW YORK ( TheStreet) -- One Ivy League professor has an interesting idea for derivatives reform : Instead of restricting the market to Wall Street whizzes, let average people bet against themselves, too.

Derivatives have been a keystone of the financial reform debate, and with good reason. Some types of derivatives were "synthetic" bets that worsened the pain of the housing crisis for most investors and taxpayers, while lining the pockets of a handful of Wall Street titans. Other types are plain-vanilla contracts that help global corporations like Coca-Cola ( KO) hedge against currency fluctuations or help companies like Delta ( DAL) protect themselves against huge swings in commodity prices. Still other derivatives act as insurance against bond default, helping troubled companies survive by issuing new debt.
Robert Hockett
Cornell professor Robert Hockett

By and large, those nuances have been lost on taxpayers and their politicians, furthering the divide between Main Street and Wall Street. People hear credit default swap, and think AIG's ( AIG) $180 billion bailout . They hear collateralized debt obligation and think of Goldman Sachs ( GS) allegedly defrauding investors. The preciseness and accuracy of those thoughts is less relevant than the emotions they stir.

But Robert Hockett, an expert in financial law and economics at Cornell Law School, can envision a day when Joe the Plumber buys a structured investment vehicle to prepare for a time when broken toilets are few and far between.

"We have derivative contracts and synthetic derivatives engineered to enable people with financial sophistication to hedge against financial loss," says Hockett. "Well, if you worry about possible fluctuations in the price of your house, what if we developed derivative products so that people who lived in certain areas could hedge against loss in their houses? Or if you are in a particular occupation - a lawyer, say - and let's say incomes of lawyers wax and wane. What if we could come up with a financial instrument that would enable these lawyers to hedge against changes in their lawyerly incomes in certain areas or times of year or whatever?"

Hockett's view is atypical and perhaps slightly controversial. He acknowledges that it isn't likely to happen any time soon, saying we must first put in place "a sane system of financial regulation," and better educate the public about finance and economics.

As Congress prepares to debate the financial reform bill, there's a crisp divide on derivatives. Republicans are generally opposed to additional oversight, as is Sen. Ben Nelson (D., Neb.), who appears to be stumping for his hometown financier Warren Buffett and his large insurance conglomerate Berkshire Hathaway ( BRK.B). The financial industry, of course, opposes greater oversight, because it will raise the cost of doing business.

However, the political climate on Main Street is one of animosity, confusion and fear. People seem about as likely to embrace an unemployment swap as they do to sign up for another subprime, adjustable-rate, NINJA-loan . They don't understand it, don't want to understand it, and don't want it at their doorstep.

Still, Hockett is hopeful that the chasm between Main Street and Wall Street can narrow by expanding the market, although he issues several caveats: If average taxpayers are availed the same opportunities; if they're given all the appropriate information; if they understand the risks; and if they're safeguarded by a muscular consumer-protection agency, as well as a systemic risk regulator.

With all those "ifs" -- albeit big "ifs" -- in place, Hockett argues that opening up the derivatives market will have a better outcome than trying to shut it down.

"The system works well for people who have a lot of money, and a lot of financial sophistication - they go hand in hand," he says. "But the same system doesn't work very well for people without a lot of money and financial sophistication."

"The title of your series is Wall Street vs. Main Street," he continued, referring to's special series of articles on the topic. "But it would be great if we could say Wall Street and Main Street."

The consumer agency has been another sticking point in the partisan battle over reform. Republicans don't want the agency, or at least not a forceful one, while Democrats have taken the opposite tack. It's not clear what the outcome will be. It's also possible that the risk regulator would prove to be just an additional layer of bureaucracy and cross-regulatory bickering, rather than a useful agency.

Hockett, one of whose mentors is economist/home-price indexer Robert Shiller, takes a historical view of the situation. He believes that reform is nigh, and that effective regulation will always depend upon the perfect formula of smart people with adequate power.

Hockett notes, for instance, that former Federal Reserve Chairman Alan Greenspan failed in his role of containing risk and liquidity - whether because of political pressures, incorrect presumptions about the market and economy, or some combination of the two. But predecessors like William McChesney Martin, who led the Fed during the 50s and 60s, and Paul Volcker, who led it for eight years under the Carter and Reagan administrations, championed the Fed as a smart, independent entity. All of them worked within the same regulatory constraints; they just operated differently, to starkly different outcomes.

"It is possible when you have a regulator who takes that role seriously," says Hockett, when asked whether it's possible to have a positive outcome on financial reform. "And before Greenspan, we did have a regulator who took that role seriously."

-- Written by Lauren Tara LaCapra in New York.