Inequality And Finace Reform

TW: I think the notion that some financial firms and individuals are betting with the house's (i.e. our tax dollar via "bailouts") money is a core frustration with our current system. This is a manageable attribute of our system which at the end of the day has many positive attributes as well. The mega returns achieved by some distort not only the financial markets but our overall economic stats and growth rates.

From Economist:
"THERE are many reasons for the rise in inequality in Anglo-Saxon nations over the last 30 years. Globalisation has played its part by allowing capital, financial and human, to shift to where it is least taxed and constricted; the arrival of China and India into the global economy has put pressure on wages of unskilled workers. A move from a manufacturing-based to a service-based economy has diminished the power of labour unions, and increased the premium paid to "talent", all the way through from software designers to sports stars. (Up until 1962, British footballers were subject to a maximum wage.) The advantages of private education have given the children of wealthy parents a head start.

But I wanted to put forward an issue that has not often been mentioned; leverage. The Anglo-Saxon economies have been in the vanguard of credit growth and in the dominance of the financial sector.

Imagine that a casino gave much larger credit limits to its punters. Whereas the odds would still favour the house, you would get much bigger gains for the winners and losses for the losers. Similarly in financial markets, rapid credit growth allows more investors and bankers to roll the dice. Some will be skilful; more will be lucky and, as Nassim Taleb, points out in Fooled by Randomess, we will find it hard to tell the difference.

But the crucial difference with a casino is that credit growth in the asset markets turns the odds in favour of the punter. The use of borrowed money to buy assets drives asset prices higher, and encourages banks to lend more money against those assets.
Furthermore, this system rewards those who have assets in the first place. The poor who have few assets don't get to take part.
What about subprime lending? Well one can see the subprime borrowers as the last ones allowed into the Ponzi scheme. The fastest growth in such lending came in 2005 and 2006; the subprime borrowers were thus the suckers lured in at the top of the market.
All this is why controls on bank leverage are so important. It was the high level of leverage that allowed bankers to make big bets, ultimately with taxpayers' money. Control the leverage and banks will make smaller profits in the boom times, and thus pay lower bonuses. But this is a slow process..."
http://www.economist.com/blogs/buttonwood/2010/01/inequality_and_leverage