Last week, George Osborne spoke to the RSA about the idea of breaking up Lloyds TSB and RBS suggesting that the existence of such large banks allowed them to behave irresponsibly. I have to admit that I have a lot of sympathy with this view, indeed I suggested the idea way back in July last year (although I first got the idea from this book). More recently, Simon Johnson, former IMF Chief Economist suggested the idea saying that any organisation too big to fail is too big to exist.

Splitting up the banks is, in my view, a good idea. A small, failing bank is less likely to get a government bailout and therefore less likely to take gigantic risks, but this alone is not going to save the financial sector and would not have prevented the current crisis. This was a far wider reaching crisis affecting most of the banking sector.

This is one thing that I don't think has been understood about this crisis, the idea that a number of banks would all take excessive risk is a crazy one, and that's because far from believing themselves to be taking risk, they thought they were taking steps to mitigate it. Credit Default Swaps, one of the main financial instruments that caused this crisis are essentially insurance policies against loans, the idea is that the lender pays a small amount to insure the loss should the debtor be unable to pay and the outstanding loan isn't covered by whatever the loan is secured against (e.g. a house).

It's not that the banks took excessive risk, it's that they fooled themselves into thinking that they weren't taking any risks. It's only when US house prices started to fall that the banks suddenly realised the level of their exposure. It's not just that the banks are too large, it is also a matter of regulating to prevent the kind of activity that allowed this risk to be taken and then hidden away.

Finance should ultimately be a means to an end, the unfortunate problem is that it's grown way beyond that. As Felix Salmon says on the US finance sector:

Financial services companies are meant to be intermediaries, middlemen. And any time that the middleman is taking 41% of the total profits in what’s meant to be a highly competitive industry, there’s something very wrong.

What we need is not just smaller banks, we need a smaller financial sector and this is where I think the Tories are in trouble and why I don't believe they can be trusted to put the finance genie back in the bottle. Labour's deference towards the city has always been reluctant. The Tories on the other hand are the party that set finance free, making policy changes that restricted the finance sector would be an admission that they were turning their backs on Thatcherism, something I'm not sure that they would be willing to do.

I do think that there is quite a lot to like about George Osborne's speech, it's clear that for all we might say about him, he does have a good grasp of the issues. The ultimate worry though is whether the Tories will be able to do what's necessary given the political capital they have invested in the status quo.

If the private polling that he is reading is telling him what the CEO of ComRes told the London Chamber of Commerce yesterday, he needs to sack George Osborne.

It's hard not to disagree after reading the FT blog earlier today.

In a piece of misjudgement that may ultimately make his decision to bring ashore what should have stayed on a yacht in Corfu, Osborne decided to attack Lord Myners for his links to tax havens.

It's hard to know whether Ken Clarke, William Hague, The Conservative Party, the Treasurer to The Conservative Party or indeed, pretty well anyone else involved at the point at which money touches the Conservative Party thought it worthwhile to pick up the phone to set the lad straight.

After all, what's the point? He's not going to be around much longer, is he?

We have never lived before under the threat of a global collapse. Financial institutions have been merging into a smaller number of very large banks. Almost all banks are now interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks (often Guassianized in their risk measurement) - when one falls they all fall.  The increased concentration among banks seems to have the effect of making financial crisis less likely, but when they happen they are more global in scale and hit us very hard.  We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogenous framework of firms that all resemble one another.  True we now have fewer failures, but when they occur... I shiver at the thought.

The Tories, of course, paraphrase that by saying it is all Gordon Brown's fault...  In a footnote to that paragraph Taleb is even more specific when he says:

Likewise, the government-sponsored institution Fanny Mae, when I look at their risks, seems to be sitting on a barrel of dynamite, vulnerable to the slightest hiccup.

As the book was published in April 2007 those words would have been written in 2006 or early 2007 at the latest.  In September 2008 Fanny Mae was rescued/nationalised/taken into conservatorship when the fuse got lit to that barrel of dynamite.

• Come the revolution, the moneyed classes will be among the first against the wall. Your correspondent is tempted to put in a good word for private equity boss Guy Hands for doing the decent thing giving up his bonus.
• Not even the smug bank (HSBC) is immune from the cash shortage, it's asked it's shareholders for a large wadge of cash, Chief Exec Michael Geoghegan has also waived his bonus this year, quite right too given the naughtiness of their consumer finance division.

• Internationally, Australia seem to be doing a reasonable job of riding out the financial storm, the Ukraine looks like it's in trouble. An EU summit at the weekend seems to have accomplished very little. Developing nations also look like they'll need to batten down the hatches. In the US problems abound with insurance giant AIG.
• At Common Endeavour we very much like President Obama, so we're pleased that talks with our own dear leader went well with lots of common ground. Let's hope the rhetoric leads on to some good sensible policy making.
• The Bank of England has cut rates to 0.5%, and announced a £75bn package of quantitative easing. Feel free to me in a collective groan as the ZanuLab pun receives a new lease of life.
• The FTSE continued to slide and remains in the doldrums, the pound despite the interest rate cut and talk of QE .

And finally, spare a thought for your poor correspondent who when trawling the finance blogs stumbled upon this piece that can onlt be described as Ye Liveliest Awfulness.