Long ago, far away, a crisis was born.

After Nine Eleven the wisest man in America (so everyone said) dropped interest rates hard and fast. If the system is flooded with cash, he mused, the people will buy stuff and capitalism will defeat terrorism. No recession on my watch.

So the Fed kept rates at an all-time low, even though some people warned cheap money encouraged reckless behaviour. The housing market was alight, prices raged and buyers bid them even higher with low-cost mortgages. Eventually the Fed began to raise rates, but in increments so small the binge did not slow.

More people warned it would end badly since house prices were supported by a sea of debt, not income gains, but the Fed went slowly, cautiously, lest a recession start. Not on my watch, said the wisest man, and then he retired.

You know the rest. The American housing market today is in the 40th month of its collapse. It destroyed a good deal of the country’s middle class wealth. It brought down virtually all of the major investment banks. It ushered in a recession which is seen to be the worst economic event since the 1930s. It has indebted America, Canada, Britain and ensured an entire generation of tax increases.

And, again, it’s spawned cheap money.

Those who influence rates, fearful of a depression, said not on my watch. As a result, there is more reckless behaviour among us. Despite fewer jobs and greater uncertainty, low-cost mortgages have encouraged a wave of borrowing and buying, forcing prices higher while igniting bidding wars. Once again, higher asset values float on debt, not a rise in family earnings.

Will the American experience inevitably be visited upon us?  Will the Bank of Canada make the same mistakes the Fed did, keeping rates low so long irreversible damage is done, sucking middle class wealth into overpriced assets destined to pop?

The answer is simple. Clear, too. It’s no.

Mark Carney is a lot of things, but stupid’s not among them. The central bank boss knows he’s playing a high-stakes game of rate roulette, aware ultra-low rates can do as much damage as good. While he was desperate to prevent a deflationary spiral, he’s now adamant to deflate an uncontrollable bubble with but one outcome.

At least one economist has found the courage to state that clearly. Carlos Leitao, of Laurentian Bank, is warning Canadians to prepare for “aggressive” interest rate increases once Carney pulls the trigger. That will likely happen in about nine months, after unemployment peaks in early 2010.

“An aggressive tightening – rather than a gradual one – will be necessary because rates are extremely low,” he says. “A measured pace would not be appropriate to ‘normalize’ rates when the starting point is virtually zero.”

Exactly. In fact Leitao says each time the Bank of Canada raises rates, it will be by as much as a full 1%.

So imagine what that would do to a 3% VRM, raising the effective rate by 33% in a single move. In fact, it would only take a couple of years of aggressive bank moves to put five-year mortgage money back into the 8% range – the average of the last twenty years.

As I mentioned here two days ago, a cheapo Van house worth $600,000 bought with 10% down can be financed now with a VRM at 3% for $2,560 a month, requiring an income $92,000. But if it renews in, say, 2014 at 8%, payments jump to $4,200, needing an income of $151,200. Consequences – obvious.

Anyone who believes this isn’t just possible, but certain, seems destined to relive history.