Paul Krugman has an excellent blog post ridiculing the doomsayers on Brexit. I agree with just about everything he says. His basic point is that, while the UK will pay a substantial economic price if it leaves the European Union (especially if the EU imposes punitive tariffs), there is not a plausible story that Brexit will lead to a near-term recession.

Krugman furthermore makes the point that many economists feel the need to exaggerate their case when arguing on trade. The point is that they believe their "free trade" policies to be good and therefore are willing to sort of make stuff up to advance their case. (Can you say "TPP?")

This is all very well-taken and I agree with Krugman 100 percent on these issues. Where I would differ is on the assumption that Brexit won't lead to a recession in the near-term. The argument is not that the reduction in trade resulting from the withdrawal would be so large as to lead to a recession. Rather, the reason stems from the fallout of collapsing bubbles.

There is a very credible case that the UK was experiencing a serious housing bubble, especially in the London market. Brexit may be bringing this to an end for two reasons.

First, UK real estate was seen as a safe haven for rich people across the globe. Therefore, they were willing to sink large chunks of money to purchase condos and houses in the UK. This perception of safety may no longer hold in the post-Brexit world. Instead of money flowing into London real estate it may start to flow out.

The other reason has to do with the strength of the London economy. It is virtually certain that the financial industry will take a big hit from the Brexit vote; the only question is how large a hit. The London finance boys were big buyers of London real estate. If they have to relocate to Paris, Frankfurt, or elsewhere, it could send London prices plummeting. 

The net effect of a plunge in real estate prices could very well be a recession. The construction sector will see a sharp fall in demand, leading a major contraction and large-scale layoffs. Similarly, as millions of homeowners see their house prices plummet they will cut back spending in response to the loss of wealth. (Have we ever seen anything like this?)

Anyhow, if events do unfold like this we could very well see a recession from the Brexit vote, although the blame would not really lie with the Brexiters. If a bubble bursts and it has bad consequences, then the blame lies with the people who allowed the bubble to grow, not the bursters. Bubbles always burst, which is why responsible people in policy positions try to prevent them in the first place.

If the folks at Bank of England and the Treasury allowed for a housing bubble to grow again following the collapse of the last one, the blame lies with them. That doesn't mean Brexit was good policy, but we don't need to hold them responsible for the failures of the elite.