These low interest rates, the argument goes, led to excessive credit extension and asset bubbles in the housing and equity markets, and to the lending excesses that ultimately caused or exacerbated the crisis. In other words, by focusing too narrowly on inflation, monetary policy ignored the financial stability implications of low interest rates.
This throws the issue of financial stability squarely into the monetary policy arena. What should the appropriate policy have been under these circumstances? Bill White argues that it means that interest rates should have been higher than they were, and this would have prevented the need for such low interest rates later on.