Democracy's advantage over other systems of government is meant to be that electorates can throw out incompetent leaders who do not respond to changing times. Knowing this, governments realise that they cannot let abuses of power continue. They must reform or perish.

Since the crash of 2008, British democracy has failed. Most of the political class and a large section of the public responded to a shock as great as the 9/11 attacks by carrying on as if nothing had happened. The effort to pretend that we can return to where we once were has been huge. But the strains of keeping up appearances are starting to show. Ideologies that once seemed dominant are now looking threadbare and ridiculous.

Bankers forced the taxpayer to bail them out with public money: a policy that free-market liberals denounced as a sin when coalminers, steelworkers and car workers asked for public assistance for their "lame-duck" industries in the 1980s. Yet those same supporters of markets remain unconcerned about a diversion of public funds on a far larger scale to lame-duck banks, and do not protest when bankers pocket the proceeds as rewards for failure beyond the imagination of the metal-bashing workers of the 1980s.

If they were being honest, they would have few difficulties in dealing with the banking lobby's attempts to intimidate democratic politicians. The foremost blackmailer – the Arthur Scargill of high finance – is Bob Diamond, who is threatening to move Barclays' investment arm to America if parliament enacts the banking commission's modest proposal to force banks to build Chinese walls between their retail and speculative arms.

True believers in markets would call Diamond's bluff. They would remind him that a big road called the M4 heads west out of London, and recommend he take it, and hang a left at the exit marked "Heathrow". They would know that he opposes reform because he hopes despite all we have been through to take the money of high street depositors to the gaming tables, and force the public to cover his debts and pay his and his colleagues' extraordinary bonuses when the bets go bad.

Financial journalists report that Ana Botín, chief executive of Santander in the UK, has also gone to the Treasury to tell George Osborne that reform cannot be contemplated under any circumstances. Once again, if Osborne were sincere, he would tell Botín that any sensible politician would treat advice from a Spanish financier with great caution. If the euro crisis destroys the Spanish banking system Britain would be in no position to clean up the mess the collapse of Santander would leave behind it.

The chancellor does not confide in me. But I can make an informed guess that Osborne has not spoken plainly to Diamond or Botín because few conservatives in Britain or America have responded to the crisis by asking where they went wrong. With the honourable exceptions of the Daily Mail and Charles Moore of the Telegraph, conservative and centrist newspapers and thinkers have not been honest with themselves or their readers about the conspicuous failure of their ideas.

A chasm between theory and practice now rends modern conservatism. What conservatives say and what they do no longer coheres. A confident centre-left ought to be charging through the holes in their opponents' lines and telling the public that unlike the crisis of the 1970s, you cannot blame the economic collapse on militant trade unions or any other leftish force. Our economy is in ruins because Anglo-American leaders ignored the lessons of the 20th century and refused to treat high finance with the necessary suspicion.

A confident centre-left has failed to take the field because, of course, it was not just conservatives who allowed a deregulated financial system to run riot but supposedly "progressive" politicians: Bill Clinton, Tony Blair and, above all, Gordon Brown. The blunders of New Labour and the New Democrats still haunt modern politics.

Search the cuttings' archives, and you will notice that the Labour party has been silent about an issue which the innocent might believe could only help it return to power. Ed Balls has banged on about bankers' pay and bonuses, and the 50% tax rate for the rich. But on the pressing question of structural reform of the banks, he has been more conservative than the Conservatives. As an approving article in the right-of-centre Economist noted recently: "It is not hard to find Conservative MPs, let alone Liberal Democrats, who are more scathing about the City than Labour's shadow chancellor."

Balls cannot address a changed world because he was as complicit as Gordon Brown was in the regulatory failures of the 2000s. Why he cannot say that he made a mistake and move on is beyond me. Modern Britain is forgiving – perhaps too forgiving – of public figures who hold up their hands and admit that they were wrong. Balls's inability to learn from the past has left the Liberal Democrats as the only political party campaigning for banking reform.

Maybe Ed Miliband is about to force a change. In briefings it is issuing today, Labour is saying all the right things. A future in which an overpaid, publicly subsidised City squats like a toad on a low-paid, low-skilled country is not a future worth having, it will argue. Britain cannot stay wedded to the failed policies of the last decade. It can no longer pretend that the British can travel back in time to the bubble world because the bubble burst and the world that went with it is gone for good. There is no "normal" to go back to.

It will make a pleasant change to hear Labour using the language of social democracy after all these years. But words are one thing and deeds are another. The banking commission's proposal to build Chinese walls in the City is a squeaking mouse of a reform. Banks that are too big to fail and too big to bail out should be broken up and that's an end of the matter. Nevertheless, it is the only reform on offer, and MPs can insert it into a bill that is already before parliament. If Labour and the Liberal Democrats join forces and tell David Cameron that he cannot postpone reform until sometime-never, we will know that both are serious. If they don't we will know that they still have not escaped from a land of make-believe.