It's a big story but amongst the many causes of the UK credit crunch there is a simple major contributor.
Put simply, interest rates were too low during the good times, and the root cause of this was political. The government set the Bank of England to target CPI instead of RPI. In a deliberate expansionist policy of low interest rates, the Bank was set an inflation target that excluded house prices, even though 70% of UK housholds own and therefore have at least a sentimental interest in domestic property prices.
The rate of house price inflation during the good years meant that an eventual bust was inevitable. Unfortunately this has coincided with a global downturn.
In this downturn the Bank of england appears to be de facto now targeting RPI instead of CPI, in order to push interest rates down faster. But they must target RPI in the good times as well as the bad, otherwise boom and bust instablility is inevitable.
