Nouriel, fresh from his trip to the UK last week, has written up his thoughts on the outlook for the UK. If you didn’t actually catch him last week, he appeared on a couple of BBC programmes that made for interesting viewing/listening.
From RGE monitor:
In many ways the UK looks more like the US than Iceland: a housing and mortgage boom that got out of control; excessive borrowing (mortgage debt, credit cards, auto loans, etc.) and low savings by households; a large and rising current account deficit driven by the consumption boom (and private savings fall) and the real estate investment boom; an overvalued exchange rate; an over-bloated financial system that took excessive risks; a light-touch regulation and supervision system that failed to control the financial excesses; and now an ugly financial and economic crisis as the housing and credit boom turns into a bust. This will be the worst financial crisis and recession in the UK in the last few decades.
But…
…one cannot totally rule out the risk of a run on the cross-border uninsured liabilities of the banking system. And short of a credible government guarantee of all deposits/liabilities of the UK banking system one could not totally rule out the risk of a cross-border run on such liabilities. A run on domestic currency deposits can be managed by the Bank of England lender of last resort provision of pound liquidity; but a run on foreign currency liabilities of banks (well beyond their foreign currency liquid assets) could not be similarly resolved given the limited foreign currency reserves of the Bank of England and given the fact that the pound is less of an international reserve currency than the US dollar is.
Related links:
In defence of Sterling – FT Alphaville
Dear Mr Rogers – FT Alphaville