A World Drowning In Financial Sludge

The U.K.’s Financial Conduct Authority (FCA) clearly has no self-awareness. It wants to tackle “sludge.” Sludge is defined as practices that create excessive friction that hinders consumers from making decisions in their own interest. It has a consultation paper called “A new consumer duty,” which you can guess isn’t a “consumer duty” at all but meant to be a supplier duty to the consumer. This is ironic because the FCA is the ultimate creator of sludge not only for its customer, the finance industry, but thereby onwards for its customer’s customer, me and you.

Regulatory sludge is not a problem local to the U.K. but a canker that is stretching across jurisdictions. The sludge is being poured onto us to protect me and you from the “bad actors.” Remember the anti-money laundering (AML), know your customers (KYC) rules were installed initially to protect us from drug dealers. All that sending of recent gas-bills etc. was to stop the devastation of the bad actors in the drug trade from laundering their huge sums of ill-gotten cash.

While we are all sludged down in a spiral of ever-increasing KYC/AML compliance, drugs remain only minutes away, while turning parts of major cities into zombie-towns all over the developed world. Buying drugs is certainly easier than opening a bank account and still the bottomless bucket of more sludge is being poured over all of us.

It is in the DNA of bureaucracy to ossify, so it is just a cycle, one that reset in the Reagan/Thatcher reorganization, but now we are back at suffocating levels. It’s not really the soul draining this brings about that is key, it is the impact on that core feature of economics: productivity. The 99% pushing pointless paper “for their own good” to protect themselves from a phantom or unaffected menace has a horrific effect on productivity, which has a terrible effect on growth. (Growth? Remember that?)

Growth is the very thing our societies need to survive the hard times ahead, but in a hogtied economy it doesn’t happen.

Sludge attacks the root of an economy, the basic activity that drives it. U.S. banks have been fined $500 billion since the credit crunch in 2007-2008; it is no wonder that financial services industries and the increasing spectrum of businesses are terrified by regulation into cutting out whole swaths of their businesses and sludging up the efficiency of their established ones to a huge detriment to us all. As such, sludge, of which the developed countries have and are polluting their economies, has killed growth by making it less and less possible to get things done.

The real impact of this trussing up of our economies is the crippling of their ability to bounce back. A bounce back from the current economic crisis where a country like the U.K. is stuck with a 6% of GDP fiscal deficit is critical. However, people are exasperated with the struggle with overwhelming sludge and many have even decided to give up trying and thereby stop working entirely. The government pleads for them to go back to economic endeavor but who is going to return to the sludgy grind?

There is a spectrum of regulation, from too loose to too tight, but when the man in the street spends a large chunk of his time dealing and worrying with it, all the while those it is meant to bar from evil deeds plough on regardless, adapt or simply pivot their business model, then the golden goose is being strangled to protect it from a fox that remains at large.

It turns out that the supply chain disruption that has caused so many problems since the end of Covid lockdowns, is a function of two years where training has not taken place while retiring has accelerated. That has been doctors, lorry drivers or even restaurant waiters. Two years of retirement without the training necessary for replacement workers and you have a deficit of labor.

Lorry drivers were a good example of this and to compensate and get back to normality, in the U.K. the bureaucracy was relaxed. That particular cycle of regulatory strangulation had meant the truck drivers in the U.S. and U.K. had an aged population because the young looked at the non-grandfathered hurdles of entering that trade and thought better of it and went elsewhere. That sludge caused that crisis. The solution in the U.K. was to cut back the sludge stopping people becoming drivers and now the shortage is over.

Cutting sludge is often a promise of political parties keen for election, but nothing comes of it, because bureaucracies are permanent hive minds very good at expelling attacking agents. So, the sludge is only set to grow and grow, while scammers fill your inbox, drug dealers zip up and down your streets and country lanes on their scooters and scammers call your mobile several times a day.

In the end it is easier to harass law abiding citizens than chase criminals, so on and on the sludge will flow, because government is a sludge ecosystem, which is why it produces it and pours it over you.