My only problem with hard levels and loot is that if you skip or miss one of the easier parts of the game and come back to it later, there's really no point in playing through it because it's terribly easy and unrewarding.
What I'd like to see is minimum levels for certains quests/areas, and if you come back to them after you've exceeded that minimum it scales the difficulty up. That way you get the best of both worlds. If you wander into a dragons den within' 10 minutes of starting, the dragon doesn't get gimped so you can kill it with your tree branch and slingshot. You also don't have the problem of missing the cave full of goblins, only to go back twenty hours later and find out that the degree of difficulty allows you to take naps and craft arrows while the goblins are trying to stab you.
To be honest, I thought Oblivion improved on some things from Morrowind like the automatic journaling of quests. Maybe a little less guidance would be nice, like giving you the rough location of an objective or map point rather than the exact location, so you have to find it rather follow the arrow that leads you directly to it. The journaling of information was nice, because the menus and organization of information for quests in Morrowind sucked.
