It was a pleasant surprise to read Gavyn Davies make cogent arguments that – even if, for argument sake, one accepts Krugman’s proposition that interest rates for the real economy might be too high – they could be too low for the financial sector, for global financial markets and encourage excessive risk-taking. Economic models take no cognisance of that. That is a cop-out. That is the point that BIS Annual Report has made, in sum. Mr. Martin Wolf had blithely dismissed the BIS as a Jeremiah, confirming that human beings either learn nothing from past mistakes or, if they do, they forget the lessons too quickly. They are masters of hindsight wisdom.
I should note too that, soon after the BIS Annual Report was released, Mario Draghi, Janet Yellen and Mark Carney came out swinging against the report. They said that interest rates were not to be deployed in aid of financial stability and that macroprudential tools would do.
I do remember reading a speech (think it was in February 2013) by Jeremy Stein (who is no longer at the Federal Reserve) that macroprudential tools work only in conjunction with interest rate tools and that price measures (interest rates) manage to go through all crevices whereas it is relatively easier to bypass or avoid macroprudential measures. Here is the link to his speech.
Further, Chapter 4 of the BIS Annual Report on the debt and financial cycles is a great read.