Economic experts have written to Britain's Queen Elizabeth explaining why the credit crunch had not been predicted, a newspaper reported today.

The letter, signed by Bank of England Monetary Policy Committee member Tim Besley, said the cause of the financial collapse was complex, but in summary laid the blame on the "failure of the collective imagination of many bright people", the Observer said.

The letter was written after the Queen had asked during a trip to the London School of Economics why no one had seen the credit crunch coming.

She has displayed a particular interest in the causes of the recession, a Buckingham Palace spokesman was reported to have said.

The three-page letter explained how cheap borrowing had encouraged a "feel-good factor", which masked a global imbalance in savings and debt, the newspaper said.

"Wishful thinking combined with hubris" had convinced financial wizards they had come up with a way to spread risk throughout financial markets," it added.

"Everyone seemed to be doing their own job properly on its own merit. And according to standard measures of success, they were often doing it well," the letter said.

"The failure was to see how collectively this added up to a series of interconnected imbalances over which no single authority had jurisdiction."

The content of the letter was discussed at a seminar at the British Academy in June, attended by Treasury permanent secretary Nick MacPherson, Bank of England deputy governor Paul Tucker and leading investment banks' chief economists," the newspaper said.

Buckingham Palace was not immediately available for comment.