In yesterday's Financial Times Martin Wolf published an article "The challenge of halting the financial doomsday machine". It appears that the mainstream analysts are slowly reaching the correct diagnosis albeit in a descriptive manner and in a roundabout way.
What Martin Wolf describes as the financial system has all classic hallmarks of a pyramid scheme (for example, of an Albanian type). However, being clearly out of his depth, he simply still does not realise that banks continue to lend with loan to deposit ratio (LTD) greater than 100% which perpetuates this doomsday machine. (Whilst writing about "leverage" could be interpreted in that way, it is far too imprecise as lending with LTD less than 100% is also leveraging).
Banning lending with LTD greater than 100% would not automatically have made financial system safe. However it would have removed a single mechanism that guarantees that financial system is a doomsday machine. (i.e. you can do whatever but if you do not remove this mechanism the system will continue operating like a classic Albanian pyramid that is guaranteed to fail).
Surprisingly (or maybe not) Martin Wolf appears to be an adversary of a free market competitive economy. He clearly does not like an idea of not bailing out failing banks. Alongside a pyramid scheme operated by the banks, they are classic anti-competitive oligopolies. For centuries, until the current crisis, banks had been allowed to fail and indeed sometimes they had. In that respect there is no reason to consider banks any different than other companies (like oil and gas). Indeed the chief issue is that "banks are too big to fail". If the banks are broken up into much smaller businesses (in a similar way as Standard Oil was broken up nearly 100 years ago) with a clear and transparent ownership (that provides reserve capital, in cash of course) and accountability, then banks can be let go bust. And if this happens individual owners will lose their investment, so they will ensure the safety ofthe system. And even if they fail, as the number of the banks will be very large, a collapse of one or two (or three) banks will be easily absorbed by the system. The kind of communist thinking ("communism for the rich") that Martin Wolf presents will ensure that the problems will not go away any time soon. Lenin is dead, long live... Martin Wolf.