Below is a speech on banking reform given last night by Mervyn King, head of the Bank of England. As you may have noticed, the banks that were deemed “too big to fail” a year ago are now, well, bigger. And despite much talk about reform, little has actually been done. King is intent on shifting the debate to the elephant in the room – breaking up the largest banks – and rightly so.

A nugget from his speech:

Never in the field of financial endeavor has so much money been owed by so few to so many. And, one might add, so far with little real reform.

And this:

The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion.

Most notably:

Anyone who proposed giving government guarantees to retail depositors and other creditors, and then suggested that such funding could be used to finance highly risky and speculative activities, would be thought rather unworldly. But that is where we now are.

This is an issue that should be bigger than politics but, alas, appears mired in them. In fact, King now joins former Fed chiefs Paul Volcker and Alan Greenspan in publicly supporting the idea of breaking up the big banks, though each for different reasons. I think what they all have in common, though, is this:

You can’t have a free market if the government continues to favor big firms over small ones.

If there is a rational benefit to anyone – banks, long-term stockholders, customers or society in general – by letting these “too important to fail” banks grow even larger, I’m all for hearing it. We’re well past the benefits of economies of scale, no? Don’t we now have more systematic risk than we did 18 months ago?

And while the benefits are spurious, the costs of continuing to let the big banks control our financial system now seem fairly obvious. More specifically, the increase in government debt as a direct result of the credit crisis is approaching 40% of GDP.

So, Mr. King, here is to helping make sure your ideas get a little more consideration.

H/t to Baseline Scenario.