Who Can Stop a Financial Bubble?

I have recently commented on systemic risk and the role of the Federal Reserve. Many commentators have done so, particularly with regard to potential bubbles.

In my past studies in both graduate school and on the job as a market analyst and as an observer and businessman, I have intimately seen how bubbles originate and then caused their damage.

I would like to make a suggestion about bubbles. No other commentator I know of has mentioned what I am recommending.

Bubbles usually are not stopped by Federal Reserve action on interest rates, as is usually suggested by the pundits. That is because politics always take over, and often preclude any dampening of interest rates by the Fed.

Not in a manner that can have an effect on any bubble. It would, for example, have had done absolutely nothing, as with the internet bubble. Or even with the mortgage bubble because interest rate adjustments then would have been applied too late. The Fed’s miscues were too early for a bubble to have been recognized.

On the other hand, action or inaction of the Securities and Exchange Commission would have done the trick. Sitting on obviously useless and dangerous underwritings instead of open-handed approvals of questionable underwritings created the internet bubble. The Fed had little to do with that.

By merely slowing down the underwriting of questionable underwriting, the SEC would have dampened many such past bubbles.