The economic crisis started in 2007 in the U.S. with the default of Lehman Brothers. It is difficult to indicate a unique cause that brought the entire globe to one of the deepest recession of the last century, but one of the main causes is the credit crunch that followed the explosion of the so called “subprime bubble”.
In particular, several banks faced major drops due to the several subprime products present in their assets. Because those contracts could not be paid anymore by the debtors, several banks had to declare bankruptcy. The bankruptcy of Lehman Brothers was the most impressive case, but many banks followed the same destiny (Bearn Stern) or had to be saved in extremis by the central banks. In particular, in the U.K, the Royal Bank of Scotland has been nationalized by the United Kingdom in order to avoid the default and a possible deepening of the crisis.
Considering that the bank were facing a several problem of liquidity and credibility, they could not afford lending money to the firms; in this way, the real economy faced a downtrend entering in the recession due to the credit crunch. In order to stop the recession spiral and a possible depression similar to the one that hit U.S. after the crack of Wall Street in the late 20’s, all the major Central Banks adopted a so called “Neo Keynesian policy”. In particular, the Bank of England lowered the interest rate to a record low (around 0.5%) and started an expansive monetary policy. This policy is called “quantitative easing” and it is one of the so called “unconventional policies” that a Central Bank can use in order to avoid the depression of a crunched economy. This policy consists in buying financial assets by the Central Bank itself and meanwhile injects liquidity into the system; in this way, banks receives liquidity and strength their reserves and therefore are able to lend money again to firms. In this way, real economy receives the necessary stimulus to restart and to avoid a long recession.
Despite the recent problems that affect the Euro-zone and therefore is somehow preventing a more stable and robust growth, the policy adopted by the Bank of England (and by the Federal Reserve) seems a good strategy for a progressive recovery and a stable growth.