Probably the most difficult proposal I shall make will be to advocate a much more vigorous role by the government in preventing bubbles from getting too large. I understand that the Fed is thinking about this, but I think this is a function that should be spread across various agencies, with perhaps the CEA being the one to try to advocate for something being done. Different bubbles may require different tools, with very precise ones that influence the relevant markets the best. Thus, for an oil bubble, use selling oil from the Strategic Petroleum Reserve. Paul Davidson has long advocated using buffer stocks of commodities to regulate excess price volatility in some markets. This can be done for some agricultural commodities as well, presumably by the USDA. In housing markets, limits on certain kinds of mortgages can be imposed, perhaps by the Fed, no interest only or other mortgages that encourage prices of housing too high for most buyers. In broader financial markets, the SEC or the Fed can use margin requirements to slow the rush to buy and push up prices, and clearly various derivatives not now under such regulations should be brought under them. So, a flexible policy not focused on one tool or approach should be used.
In this regard, let me issue a warning. While many have sneered at Alan Greenspan for his reluctance to do anything about bubbles, it should be kept in mind that, aside from margin requirements, the main tools available or the Fed are probably too blunt. Thus, no one should forget that the overly tight monetary policy of 1929-30 was substantially driven by a desire to squeeze down the stock market bubble of the late 1920s. Clearly a tool can be overused. And, while many also sneer, it is also not always that easy to know when a bubble is going on, although I think this can be done. In this regard, Greenspan himself jumped the gun with his famous remarks in 1996 cautioning against "irrational exuberance," which caused the stock market to drop the next day, but then to start climbing again, with the main market indices not ever getting down that low again (although I think the NASDAQ has, which was the bubbliest).