ME and Ophelia

The Queen has been sent a letter by a group of eminent economists explaining how "financial wizards" failed to "foresee the timing, extent and severity" of the economic crisis, it was reported.

The three-page letter, signed by London School of Economics professor Tim Besley, an external member of the Bank of England's monetary policy committee, and political historian Peter Hennessy, was sent after the Queen asked on a visit to the LSE why nobody had predicted the credit crunch, according to the Observer newspaper.

The letter ends: "In summary, your majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole."

The letter talks of the "psychology of denial" that gripped the financial and political world and says "financial wizards" convinced themselves they had found ways to spread risk throughout the financial markets - a great example of "wishful thinking combined with hubris".

The content was discussed during a seminar at the British Academy in June, attended by Treasury permanent secretary Nick MacPherson, Goldman Sachs chief economist Jim O'Neill and Observer economics columnist William Keegan, the newspaper said.

A Buckingham Palace spokewoman would not discuss the correspondence but said: "The Queen always displays an interest in current issues and is kept abreast of current issues. Obviously the recession is very topical."

In March, Mervyn King became the first Bank of England governor to be invited for private talks with the Queen.

When she visited the LSE in November last year she asked Professor Luis Garicano, of the economics' management department, about the origins of the credit crisis, saying: "Why did nobody notice it?"

Prof Garicano told the Queen: "At every stage, someone was relying on somebody else and everyone thought they were doing the right thing."

The Queen described it as "awful".

Prof Garicano said afterwards: "The Queen asked me: 'If these things were so large, how come everyone missed them?"'