Conversation with Winton - banks, gearing, externalities and market failure

I fear that discussion with my old friend and blogging colleague Winton Bates on his post How can governments stop encouraging banks to be highly geared? has distracted me from posting here. Feel free to drop in and join the discussion; that includes a specific invitation from Winton to you, kvd.

I imagine that it would seem pretty dry stuff to the ordinary reader, but its quite important from my perspective. It's forcing me to revisit and redefine concepts such as market failure and externalities. I won't explain at this point, for I don't want to distract from the discussion at Winton's place by creating another discussion thread here.