It wasn’t so much low interest rates that did this. It was the relaxing of lending rules - mandated by the federal government - to make easier for people with poor credit and no money to qualify... Basically to give loans to people with sub prime credit and with virtually no money down. Suddenly just about everyone qualified for a home loan... This was all to get “minorities” into a house so said the politicians. Well they succeeded... At least in the short term... Too bad they failed to see the obvious consequences...
I agree the Fed appears to be out of options. If their only tool left is to lower rates they are in trouble.
You're right, of course, but there's another point here. Remember that banks and insurance companies have enough money to buy any politicians they want, and get whatever laws they want passed (why do you think you have to wear a seatbelt?).
The banks went along with this because of greed - they engaged in wishful thinking that the housing market would continue to inflate so that they would never have to worry about the consquences of bad loans - there would always be buyers waiting in line in case the last guy defaulted. They got caught up in the housing bubble, too.