What started as a credit crunch and financial downturn in
2007/08 has developed into a G7 economic recession. The feedback
loops between the financial system and real economy have proved far
more powerful and 'contractionary' than most forecasters
predicted.
The UK's recession has been deepened by the high level of
consumer and corporate debt in the economy, and the fall in house
prices. Government sponsored support and re-capitalisation schemes
for the financial system, which were first announced in 2008, have
proved inadequate as the scale of bank balance sheet impairment has
dwarfed the early schemes and banks have been left with toxic
assets on their balance sheets.
The uncertain scale of the losses on toxic assets, many of which
are tied in value to the US housing market, has meant that UK banks
have been hoarding cash, both because they have been reluctant to
lend to other banks, and in order to meet capital ratios. This cash
stockpiling, alongside reduced
