'We are looking straight into the face of a Great Depression'

Who said it? Some blow dried, CNBC Cassandra? Perhaps a Fox Business jokester?

Nope. MIT Sloan School of Management professor Simon Johnson speaking at the opening of the CFA conference in Paris:

"We have built a dangerous financial system in the United States and Europe," said the former chief economist at the International Monetary Fund. "We must step back and reform the system."

Professor Johnson cited alarming parallels with October 1931, when "people thought the worst was behind them, but the smart people were wrong and instead the crisis just broadened."

Johnson began his talk by pointing to the recent failure of MF Global (MF) as good news because it "barely caused a ripple in markets, despite its $40 billion balance sheet." But he contrasted this with the conundrum of "too-big-to-fail" banks in the financial system, which have all benefited hugely from an implicit state guarantee. Citigroup (C) survived even with $2.5 trillion of liabilities at the time of its rescue, Johnson noted, and the U.S. government-sponsored enterprises Fannie Mae and Freddie Mac lobbied hard to pump up their risk - but both had to be rescued by the U.S. taxpayer.

We haven't learned a thing from 2008. All of the big banks - and big banks around the world - are horribly exposed. And it's deliberate, not an accident.

"The biggest banks are larger today than they were three years ago," said Johnson, who thinks they are basically carrying too little equity capital. Even Germany's Deutsche Bank, regarded as a strong bank, currently carries a €1.85 trillion balance sheet on the basis of equity capital of only €60 billion, a multiple of 31 times leverage. "The dark magic in banking math is risk-weighted assets," said Johnson. "It is an illusion to say we can calculate a risk free-rate on the basis of sovereign debt, which defaults on a regular basis." Agency issues such as executive appetite for risk in banks, highlighted by a recent academic paper by a trio of researchers, serve to pump up the risk in large banks.

For Johnson, recent financial reforms are not enough. Proponents of Dodd-Frank might point to measures by the Federal Deposit Insurance Company (FDIC). But Johnson thinks this U.S. institution has been shown as incapable of dealing with global cross-border institutions. The Lehman failure was certainly complicated by uncertainty surrounding overseas operations.

These banks know they are "too big to fail" and that governments have to bail them out if they get into trouble because the altnerative is the possibility that the entire financial system holding up the world economy would collapse - along with currencies, transportation systems, credit, and other vital sectors.

That's the danger of the European debt crisis. Not tiny Greece going under. But how close Italy, Spain, and perhaps even France are to going over the cliff, pushed by their institutional banks who are recklessly taking risks they should be prevented from doing.

You can't say we haven't been warned.