Why did Iluvatar allow aule to create the dwarves

[thorondil]

The Valar, Maiar, and the Children of Iluvatar did alot of foolish things that Eru did not stop. They were all creations that had independent wills, but...

From Ainulindale:

And thou, Melkor, shalt see that no theme may be played that hath not its uttermost source in me, nor can any alter the music in my despite. For he that attempteth this shall prove but mine instrument, in the devising of things more wonderful, which he himself hath not imagined.

As for the Dwarves...

Quoted from letter 212:

The One rebuked Aule, saying that he had tried to usurp the Creator's power; but he could not give independent life to his makings. He had only one life, his own derived form the One, and could at most only distribute it. 'Behold' said the One: 'these creatures of thine have have only thy will and thy movement. Though you have devised a language for them, they can only report to thee thine own thought. This is a mockery of me.'
Then Aule in grief and repentance humbled himself and asked for pardon. And he said: 'I will destroy these images of my presumption, and wait upon thy will.' And he took a great hammer, raising it to smite the eldest of his images; but it flinched and cowered from him. And as he with withheld his stroke, astonished, he heard the laughter of Iluvatar.
"Do you wonder at this?' he said. 'Behold! thy creatures now live, free form thy will! For I have seen thy humility, and taken pity on your impatience. Thy making I have taken up into my design.'