Can we afford our financial system? The answer is no. Understanding why this is so is a necessary condition for evaluating ideas for reform. The more aware of the risks one is, the more obvious it becomes that radicalism is the safer option.

People pay too much attention to the direct cost of bail-outs. As Andrew Haldane of the Bank of England, author of several brilliant papers on the crisis, has noted, these costs may be around 1 per cent of gross domestic product in the US and UK. The costs that matter, however, are those of the recession and the huge jump in public debt. If only a quarter of the world's loss of output during the recession were to prove permanent, the present value of these losses could be as much as 90 cent of annual world product.

How did this happen? Quite simply, the financial sector has become bigger and riskier. The UK case is dramatic, with banking assets jumping from 50 per cent of GDP to more than 550 per cent over the past four decades. Capital ratios have fallen sharply, while returns on equity have become higher and more volatile. As Mr Haldane notes in another paper, leverage is the chief determinant of returns on equity and increased leverage also explains the level and volatility of banking returns. Finally, the banking sector has also become substantially more concentrated. (See charts.)