The authors write:
"There is a fundamental flaw in the way central banks set official interest rates. This flaw has created what might be called the “low-interest-rate trap”. Low rates induce excessive risk taking, which increases the probability of crises, which in turn, requires low interest rates to keep the financial system alive. The flaw behind all this is the failure of central banks to take account of the probability of financial crises when setting interest rates."What garbage. The trap we're in now is that the Fed is simply too stupid or uncaring to do anything about below-target inflation and above-target unemployment. Not that low rates are inducing increased risk taking and increasing the probability of future crisis. Yes, the Fed might have kept interest rates too low which helped feed the housing bubble, and now they are low b/c the economy is still depressed, but I don't see where the trap comes into play in this sense. The only trap is that Bernanke should be doing more QE and he isn't.