Interestingly, through the second half of 2007, there was a marked disconnect between equity markets and credit markets. Credit markets came to the realisation significantly earlier that something was going badly wrong in the financial markets, but for quite a considerable period of time, equity markets assumed nothing worse than a garden variety economic slowdown was in prospect. Lazy trust evaporated.
But I agree that the side-effects of an extraordinarily loose monetary policy increase over time and I have pointed that out repeatedly. But after pursuing such an expansionary monetary policy, it would be wrong to now move abruptly in the other direction. That wouldn’t help either the economy or price stability. But rather? I am very much in favour of normalising monetary policy.