January 21, 2008 (LPAC)--Pity the poor British Empire, whose attempts to sell deregulation as the way to run a financial system are now being savagely undercut by reality. The City of London has long argued that "financial innovation" is the way to go, pushing the use of securitization and derivatives as the model for the financial system, but now that the CDOs, SIVs and other innovations so beloved by the City have blown up so spectacularly, some people--mostly those with working brains--are beginning to have doubts.

"The City of London's reputation for financial innovation" is "evolving from a benefit to a concern," the Financial Times worried today, complaining that "structured investment vehicles, collateralized debt obligations and their like were giving innovation a bad name."

Now at risk, the City fears, is the success of their operation to convince the United States to abandon regulation in favor of the imperial "light touch" method. The Brits had been pushing what they called "principles-based regulation" as opposed to "rules-based regulation," which might sound benign until you consider the principles upon which the empire is based. As the financial system blows apart, "U.S. admiration for the British regulatory model now appears to be cooling," the FT frets.

"Twelve months ago we were talking about competitive deregulation and the [U.K. Financial Services Authority] was the flavor of the month. That's changed because of the subprime crisis," said Barney Frank, chairman of the U.S. House Financial Services Committee.

The City had presented this principles-based system "as a possible model to replace the rules-based system set up in the 1930s in the wake of the Wall Street crash," the FT said in a clear reference to the protections put in place under Franklin Roosevelt. It was the systematic dismantling of those protections in favor of the British model which allowed the creation, and the collapse, of the largest speculative bubble in history.

With each passing day, it is increasingly clear that FDR was right, and those who destroyed the apparatus he erected to protect the public from rapacious banking practices were wrong.