Mr Dyke, who was forced to quit as director-general in 2004 after the Hutton report into the death of government scientist Dr David Kelly, said there had never been a greater separation of the “political class” from the public.
He said the expenses scandal had been “British democracy’s Berlin Wall moment”, but he feared the opportunity to change the system was fading.
Speaking at a LibDem conference in Bournemouth, he said: “The evidence that our democracy is failing is overwhelming and yet those with the biggest interest in sustaining the current system – the Westminster village, the media and particularly the political parties, including this one – are the groups most in denial about what is really happening to our democracy.
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“I tried and failed to get the problem properly discussed when I was at the BBC and I was stopped, interestingly, by a combination of the politicos on the board of governors, one of whom was married to the man who claimed for cleaning his moat, the Cabinet, interestingly – who decided to have a meeting, only about what we were trying to discuss – and the political journalists at the BBC.
“Why? Because, collectively, they are all part of the problem. They are part of one Westminster conspiracy. They don’t want anything to change. It’s not in their interests.”
Dyke said an independent commission should look at ideas such as moving the seat of democracy out of Westminster, a fully elected upper chamber and halving the number of MPs, as well as reforming expenses.
“It’s time to be radical. Our current model was designed for the eighteenth century. It doesn’t fit 21st-century Britain,” he told the conference.