This week saw yet another Washington hearing about Wall Street's past misdeeds, this one convened by the Financial Crisis Inquiry Commission to probe the role of the rating agencies in the near collapse of the financial system in 2007 and 2008. True, without the help of Moody's Investor Service and Standard & Poor's slapping triple-A ratings on top of pools of subprime mortgage-backed securities structured by Wall Street, the market meltdown wouldn't have been nearly as catastrophic as it proved. And Wall Street's banks and investment banks fueled the fire, by trying to spin straw into gold in the first place. (That didn't even work in the fairy tales.)

Fueling the populist fury and the quest for villains in Washington's hearing rooms is the news that most of the surviving Wall Street firms continue to make money hand over fist, while the unemployment rate hovers at a stubbornly high level of 10 percent. Last month, compensation consulting firm Johnson Associates Inc. provided an early look at what Wall Street folks can expect in the way of pay increases this year.

The winners include those working at hedge funds and private equity funds (a boost of 15 percent to 20 percent) and those who manage money for the country's wealthiest families or for mutual funds. Within the ranks of the banks themselves, risk managers and prime brokerage managers can expect to see gains of 10 percent to 15 percent, as can senior executives. Only the slow-growth areas—retail banking, commercial banking—that happen to be the lifeblood of Wall Street, will see flat salaries this year, Johnson Associates predicts.

The urge to earn a bonus check with an extra zero on the end of it certainly played a big role in the financial crisis, as short-term incentives trumped long-term strategic thinking and risk management. But not all of Wall Street's inhabitants are equally culpable, an important fact that the Washington hearings are in the process of obscuring. The uncomfortable truth is that we can't eradicate greed from Wall Street, and that even if we could, we shouldn't try to do so.

Greed, as the fictional Gordon Gekko famously said in the movie Wall Street, is good. Maybe his time in a federal pen for violating securities laws has caused Gekko to revise that conviction (we'll have to wait for the sequel, due later this year, to find out), but the truth is that greed is what makes the financial system function. Rather than clucking in outrage at the idea that Wall Street is greedy, what all those senators, members of Congress, and FCIC commissioners should be doing is how to distinguish "good" greed from "bad" greed.

Once, everyone on Wall Street was assumed to be a master (or mistress) of the universe—smart, talented, articulate, polished, and capable of mastering all kinds of arcane terminology about the most complex financial products. Today, some are reluctant to use company credit cards in public, and dissemble when asked what they do for a living. Reality, as usual, lies somewhere in the middle: Wall Street's ranks certainly include fools and nitwits. But they also include some exceptionally smart, driven, and focused individuals who have a keen eye for what their clients need and what will make the financial system run more efficiently.

Some of those individuals were indeed responsible for the creation of products and strategies that contributed to the financial crisis. But they didn't set out to enrich themselves at the expense of Main Street or the taxpayers. The bankers of the 1980s who helped make mortgage securitization mainstream never dreamed that their product would be used to help migrant workers with incomes below $25,000 buy homes worth $500,000. Nor did the team of bankers who developed credit derivatives in the mid-1990s intend for their collective brainchild to be used as part of a high-stakes casino game. Rather, they saw credit default swaps as a new product that would help their sophisticated institutional clients (banks, insurance companies, and the like) manage their large balance sheets more efficiently.

Of course, the bankers who pioneered these and other innovations expected their efforts to turn into big paydays for themselves. Why not? They had helped their clients save millions of dollars or develop a new source of income. It was only reasonable that their institution collect a fee for their work, and pass on a chunk of that in appreciation to the Wall Streeters who had made it possible. That's good greed at work—long-term greed—the kind that senior executives at Goldman Sachs proclaimed proudly was the only kind that they espoused.

Bad greed, on the other hand, is what happens when bankers start taking those innovations and distorting them or using them in ways that have the potential to harm their clients or the financial system itself, and tends to surface when lust for a massive bonus check replaces the impulse to help a client in the mind of a banker or trader. And somewhere in the last decade or two, good greed gave way to bad greed across Wall Street and became the norm.

True, Wall Street bonuses fell an average of 44 percent in 2008, dipping back below $100,000. But that was still 150 percent higher than the average bonus paid 15 years earlier, or 70 percent higher on an inflation-adjusted basis, during a period when the average wage had grown only a few percentage points a year while the U.S. economy expanded at an average rate of 3.2 percent annually. The sign that bad greed had taken over was the amount of complaining about a slump in compensation in a year during which taxpayers footed the bill for the bailout of the entire financial system, a bailout made necessary by the actions of the bankers who had succumbed to "bad greed."

If the FCIC and Congress want to do something truly valuable, they need to push beyond simply reflecting their constituents' reflexive outrage against Wall Street. Simply demanding pay caps or restrictions on Wall Street's creativity is a ham-handed solution to a complex problem; the result could be to kill off good greed as well as bad greed. Instead, they need to ask themselves—and those in the hot seats in front of them in the Washington hearing rooms—just how and why the line between good greed and bad greed was crossed. The first recommendation in the report the FCIC members have pledged to deliver by year-end should be how to stop that from happening again. Then we might begin the process of truly constructive Wall Street reform.