U.K. Outlook: Nation-Sized Experiment in Regulatory Arbitrage?

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Two case studies, Mexico and Britain, were the subject of my February newsletter: Black Swans and Petrostates. Readers already know my views about risk to the UK, from an earlier blog post, Petrostate Tail Risk: The UK Joins My List. Essentially, what’s happening to Britain is that an historic financial crisis has arrived not long after the country has tipped from next oil exporter, to net oil importer. That’s a lot of change to handle all at once.

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What will make this historical moment all the more difficult, and perhaps quite ugly, would be the explosion of anti-immigrant, anti-foreigner sentiment that is now welling up inside the country. I’ve been watching this story for several months now. Lest readers think the above photo of Brick Lane, 1978 is a wee bit hyperbolic, I would note that some foreign workers are already having to be protected by guard in the UK. Yesterday, the Wall Street Journal carried quite a big piece on the subject: In U.K., Slump Poses Challenge to Support for an Open Economy.

Britain is not, and will not, be unique in this regard in the years ahead. I fully expect to see the same tensions both here, and in Europe. But, just as waves of UK immigration preceded the high unemployment of 30 years ago, so have more contemporary waves of immigration preceded the current crash. This will not end well.

London, and the UK, now look to have been a nation-sized experiment in regulatory arbitrage. Margaret Thatcher’s Big Bang put the Square Mile into overdrive starting 25 years ago. Thus began a powerful transformation in which Britain captured all the pent-up free market urges so constrained on the Continent. The result? Behemoth banks and financial institutions that dwarfed the country’s ability to “get its head around them.” And then, a final starburst of rapacious credit expansion which has devolved now into an epic real estate bust. Britain’s housing bubble was King, Queen, and Archduke of all global housing bubbles.

It’s a certainty that this financial crisis will trigger various political crises across the globe. There is a kind of script to these things which I don’t think can be entirely avoided. The chatter already is that Scotland Yard is getting prepared for a Summer of Discontent. On the classical crisis timeline, that sounds about right to me.