Mar 05 2009

Blighty: A Nation Sized Experiment in Regulatory Arbitrage

March 5, 2009

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 alot of change to handle all at once.

brick-lane-1978

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.  Today, the Wall Street Journal has done 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.

-Gregor

• Comments (9)
Author: Gregor Macdonald   Posted in: crisis   Tagged:                
  • faustroll

    Gregor,

    Thanks for posting another thoughtful foray into political economics: well crafted, well framed, and provocative of thought as always.

    Interesting to note that Bagehot's England, pioneer and model of the bond and credit markets, has again found itself on the backside of yet another credit bubble, and of course this time Britain incorporated some of the innovations from their friends across the widening sea. The expansion of personal debt and the housing bubble are of a piece.

    Ten years ago in a book called “The Hungry Spirit” , Charles Handy, bless him, was marveling at the post-industrial growth in Britain and was waxing philosophical as only business “thinkers” can about how there is more to life than just “getting and spending” and laying waste to our powers in the effort to keep a roof over our heads and a chicken in the pot. I remember idly thinking at the time that I ought to pen a retort and call it “The Hungry Checkbook” or “The Hungry Liabilities.” While Mr. Handy was thinking such lofty thoughts about how his fellows might come to the via contemplitiva by riding the wave of a credit bubble into endless otium, the liabilities were growing and the obligation, the debt was coming due.

    The need to pen such a retort seems somewhat obviated now. The ability to engage in “getting and spending” can itself seem a luxury in a contraction. . Welcome to Depression 2.0

  • gregor.us

    Cheers. As I've been talking about the potential for widespread labor action both on the blog and in my newsletter, at times it has seemed a bit over the top to be suggesting the UK is headed a broader set of troubles. Now comes the WSJ to cover the story, once it's more clear.

    Terribly ironic (or perhaps not) the latter part of the credit bubble unfolds under an Exchequer turned PM, and bursts while he's at the helm.

    Labor action, riots have a storied tradition in Britain. They're pretty good at it. Of course, this eventually devolves into scapegoating. This time around, I'd prefer it if the British blamed we Americans, and left their hard working immigrants alone.

    G

  • faustroll

    not in the slightest over the top. If there is something good about this crisis and there always is something good about any crisis, it is the return of politics to discussions about economics. A return to politcal economics might be the bedrock from which new trade and innovation and even wealth will return. And discussions and coffee houses and blogs are exactly the places where the mix happens.

    I appreciate your thinking and your writing both and I am always amenable to persuasion. I especially enjoy well thought out arguments with which I initially disagree from vantages I have not myself arrived at.

    I too find the bashing of those immigrants who have taken over the labors in our countries to be not only distasteful and unfair but disingenuous scapegoating. We have a kind of unlabor unrest.

    cheers

  • http://benatlas.com/ Ben Atlas

    To rely to your twit: I guess you don't count on Eastern Europe to start the riots, after all riots in Eastern Europe is the way of life…

  • gregor.us

    I am perhaps being chauvanistic in a back-door way, by responding to your original tweet about riots in the UK, and, using OECD riots as the example that would shock or get attention. I reluctantly accept that riots and unrest in London and NY are the gold-standards for political crisis. So, yes, since riots in developing countries are more “expected” I am ignoring them.

  • http://benatlas.com/ Ben Atlas

    To rely to your twit: I guess you don't count on Eastern Europe to start the riots, after all riots in Eastern Europe is the way of life…

  • gregor.us

    I am perhaps being chauvanistic in a back-door way, by responding to your original tweet about riots in the UK, and, using OECD riots as the example that would shock or get attention. I reluctantly accept that riots and unrest in London and NY are the gold-standards for political crisis. So, yes, since riots in developing countries are more “expected” I am ignoring them.

  • http://benatlas.com/ Ben Atlas

    To rely to your twit: I guess you don't count on Eastern Europe to start the riots, after all riots in Eastern Europe is the way of life…

  • gregor.us

    I am perhaps being chauvanistic in a back-door way, by responding to your original tweet about riots in the UK, and, using OECD riots as the example that would shock or get attention. I reluctantly accept that riots and unrest in London and NY are the gold-standards for political crisis. So, yes, since riots in developing countries are more “expected” I am ignoring them.