It’s always interesting how the odds are always stacked against the small investor.

Consider the following scenarios: (oversimplified, but it’s to make a point)

- Family buys a home speculating that the price would increase. They put 20% down on a 500k house and get the other 80% as a mortgage. (effectively they are buying the house on margin). If the price of the house goes up 20% they effectively made 100% on their initial investment of 20% down. If the price of the house goes down 20% they have effectively lost their initial investment. What if they can’t afford the mortgage? They go into foreclosure and the house is taken from them.

Now if your a big financial institution the rules should be the same right?

- Financial institution speculates the real estate market would boom. They use 40x leverage to bet on the housing boom. When the market is booming they are raking in the money. However when the market turns south and they can’t afford to pay up the government steps in to give them a helping hand. Uncle Sam is willing to go so far as to extend loans funded by taxpayer money to private corporations. When this doesn’t work the government outright intervenes or promises to step in with taxpayer money to bail them out. (Fannie, Freddie, Bear Stearns)

I am perfectly fine with people taking risks and reaping in the rewards. However there is a fundamental problem with our capitalist markets when rewards attained from risky bets are lining the pockets of a select few and losses from the bad bets are being shouldered by the taxpayer. Who in their right minds wouldn’t bet with other people’s money (OPM) when the risk/reward ratio is so skewed?

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