OECD research found a high correlation across countries between the degree to which a nation's interest rate was below its estimated Taylor-rule level and the size of its housing boom, including Spain and Ireland — providing evidence that the loose-money-causes-housing-boom mechanism works globally, not just in the US.

The proper monetary-policy lesson is essentially technical, not political: the very low rates were an effort to over-fine-tune ('the perfect becoming the enemy of the good') — trying to do even better than the successful 20-year record — and the lesson is to return to the basic fundamentals that worked rather than overdo fine-tuning.

Traditional money measures like M2 became unreliable because technological and regulatory changes let people make payments without traditional money forms; this is why central bankers and policy rules like the Taylor rule focused on interest rates to stand in for hard-to-measure money growth.

Low rates encouraged excess risk-taking through a self-reinforcing feedback loop: rising housing prices gave borrowers incentive to keep paying and not default, which misled underwriters into thinking investments were less risky, so more investments were made on that assumption — a process that reversed when prices leveled off and delinquencies and foreclosures rose.

The fall 2008 panic was probably not caused primarily by the Lehman Brothers bankruptcy: the major market movements (S&P 500 dropping 28% in three weeks, surging money-market spreads, global export collapse) occurred at least 10 days to two weeks after Lehman, coinciding with the government publicly warning of disaster to sell the TARP program, which itself scared markets.

Ad-hoc discretionary policy is structurally appealing to policymakers because announcing a general rule limits flexibility and ties their hands, putting them in positions where their rules require saying no when they want to say yes; this is why rules-based approaches (monetary rules, constitutions) are valuable but politically hard to maintain.

The Fed does not literally set the federal funds rate; it injects or extracts bank reserves (changes the money supply) so that the actual overnight interbank rate is brought into line with the FOMC's target.

Easy money causes excesses but you cannot predict where they will show up; based on 1960s and 70s experience, monetary policy did induce booms and slumps in housing, making housing a logical place for the excess to occur this time.

The 'conundrum' of long-term rates failing to rise when the Fed began raising short rates was likely because market participants were unsure whether the Fed was permanently abandoning the policies of the 80s and 90s, so much of the long-rate adjustment was a surprise.

The global savings glut explanation for low long-term rates has factual problems: measured global savings rates in that period were actually lower than in the 70s, 80s, and most of the 90s; Greenspan's fallback to intended-versus-desired savings is essentially unmeasurable and thus an unsubstantiable argument.

Monetary policy transmits globally through exports/imports (via exchange rates), capital flows (via interest rate differentials), and a tendency for small open economies to follow large economies' rates — e.g. if the US cuts rates and Sweden's Riksbank does not, the Swedish currency appreciates, pressuring it to follow.

If each central bank simply did what was right for its own country (keeping its inflation low and creating stability), the world would have very good performance overall — meaning much explicit international coordination is unnecessary, though it remains useful to ensure no central bank makes life difficult for its counterparts.

Disruptions in financial markets come from surprises — unanticipated events markets cannot discount; the Lehman problem was that after the Bear Stearns intervention markets expected Lehman to be bailed out too, so the non-bailout was a surprise, whereas a clear strategy articulated right after Bear Stearns would have substantially reduced the impact.

Policymakers face an asymmetric incentive structure that biases them toward intervention: there is little reward for saying no when things then work out fine, but a huge penalty if they say no and things fall apart, creating strong pressure to say yes — which reduces short-run damage but causes long-term difficulties and a self-perpetuating bailout mentality.

Much of the financial crisis was caused by excessively loose monetary policy, evidenced by interest rates in 2003-2005 being much lower than would have been expected based on the monetary policy that worked well during the long expansions of the 1980s and 1990s, as measured by the Taylor rule.

Good monetary policy under the Taylor rule means the central bank's interest rate adjusts by a sufficient (quantifiable) amount when inflation or GDP rises or falls — rising at least as much as inflation increases, and being cut by specified amounts during recessions — which allows specific measurement and comparison against actual policy.

Holding the federal funds rate at 1% in early 2004 — nearly three years after the 2001 recession ended, while the economy and inflation were rising — represented a long period where rates were the lowest in the previous 40 years, amounting to injecting too much money into the banking system.

The Fed kept rates excessively low because of well-intentioned efforts to prevent something worse — primarily a fear of deflation and continued worry about the aftermath of 9/11 and the bursting dot-com bubble — not because of bad intentions or incompetence.

Low federal funds rates transmitted to the housing boom through two channels: lowering adjustable-rate mortgage rates (about 30% of mortgages, a rising fraction, often at low teaser rates) which increased housing demand, and through the term structure feeding short rates into the long rates that 30-year mortgages depend on.

The Fed's accumulation of roughly a trillion dollars in assets — over half of it mortgage-backed securities — has injected an enormous quantity of excess reserves into the banking system, creating a serious risk that when the economy recovers and banks lend it out, substantial inflation will follow unless the Fed successfully removes the reserves in time.