The low-interest road to ruin

There's little doubt that without these measures, more Australians would have taken out mortgages that they would have eventually been unable to service; there would have been more mortgage defaults and more forced sales, putting more downward pressure on house prices; and banks and other mortgage lenders would have incurred bigger losses. So, a key lesson from the crisis should be that inappropriately low interest rates can be as damaging as inappropriately high ones.

And that's a lesson that needs to be borne in mind in the current debate as to when, and how, the stimulus that has been provided to cushion the impact of the financial crisis should be unwound.

In most other Western countries, where net public debt is set to approach or in many cases exceed 100 per cent of gross domestic product (GDP) over the next five years, fiscal policy settings are clearly unsustainable. Those countries need to give priority, as soon as economic conditions allow, to ''fiscal consolidation'' (that is, cutting government spending and raising taxes). As a result, monetary policy will need to play a greater ongoing role in supporting economic activity; and the damage done during the financial crisis to banks' capacity to lend, and to private-sector balance sheets, will probably reduce the risk of new bubbles emerging.

In Australia, however, the situation is the opposite. Our fiscal policy settings are in no sense unsustainable: most other Western governments would swap their debt-to-GDP ratios for ours in an instant. However, our monetary policy settings are almost certainly not sustainable for much longer, given how much circumstances have changed from those envisaged when those settings were being established late last year and early this.

That's not to say that the Reserve Bank will, or indeed should, be lifting its cash rate at next month's board meeting, or even the one after that. But it would be ironic, and ultimately tragic, if Australia's monetary authorities were now to make the mistake that to their great credit, and Australians' great benefit, they avoided making in the years leading up to the global financial crisis.