The current banking crisis has its roots in banking system reforms introduced by Gordon Brown in his days as Chancellor, a report claimed today.

Mr Brown's decision to give the Bank of England a 2.5 per cent inflation target was "deeply flawed" and led to excessive borrowing and mortgage and consumer lending, the report from the rightwing Centre for Policy Studies think-tank, said.

Meanwhile, Mr Brown’s removal of responsibility for banking oversight and regulation from the Bank of England in 1999 was followed by a failure to spot the clear signals of imminent problems in the sector, according to Howard Flight, the report's author.

Mr Flight, a former Conservative MP who was shadow chief secretary to the Treasury between 2001 and 2004, also described Mr Brown’s claim of “an end to boom and bust” as an economic failure, which contributed to the current crisis.

He accuses Mr Brown of mistakenly conflating consumption growth with economic growth and failing to recognise "as long as five years ago" that lending, debt and house prices were rising too fast.

In "From Boom to Bust: a plain guide to the causes and implications of the banking crisis" Mr Flight wrote: “The responsibility for the probability of a UK banking crisis can be laid largely at the current Government’s door.

“The roots are in mistaken monetary and economic policies and in regulatory failure. These effectively encouraged banks to lend imprudently as there was too much money around to lend cautiously...

“It is a tragic irony that the once highly acclaimed 1997 Bank of England reforms have turned out to have been the main underlying cause of the unsustainable rise in house prices and of the excessive increase in consumer debt. Together these have destabilised both the UK banking system and the wider economy.”

The 2.5 per cent target did not allow the Bank of England’s Monetary Policy Committee to take into account soaring house prices and the impact of cheap imports from Asia, allowing excess consumer demand to run out of control, Mr Flight said.

He said that the Bank acknowledged in a conversation with him as long ago as 2003 that credit and house prices were rising too fast, but said that it did not have the remit to address the problem.

Mr Flight wrote: “Since 2002, economic growth came not from any material increase in output. Rather it was based on consumption growth, financed by unsustainable mortgage and consumer borrowing, and the massive increase in public sector spending. The UK has been living on borrowed time for at least the last four or five years.”

The report called for a substantial interest rate cut, investment in infrastructure projects, reductions in personal and corporate taxes and the beefing up of the system of government guarantees for loans to small companies.

A Treasury spokesman said: “It is widely accepted that this is a time of unprecedented turbulence in the world economy and no country can isolate itself from these global challenges.

“The tripartite structure adopted in the UK, which gave independence to the Bank of England and established the Financial Services Authority as an independent financial market regulator has been praised and accepted as a model, replicated in many countries around the world.

“An independent Bank of England has delivered low and stable inflation for 10 years and interest rates today at 4.5% compared to rates of up to 15% in the 1990s.”

Mr Flight is predicting a severe recession, with “vicious” house price falls, a falling stock market and a large devaluation of sterling. Government borrowing is likely to rise to more than £100 billion this year and for the next two years, he said.

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