Fed Governor Sarah Bloom Raskin recently gave a speech titled Beyond Capital: The Case for a Harmonized Response to Asset Bubbles that lays out her vision of how the Fed should respond to asset bubbles. The first part of the speech is her description of how bubbles arise:

Here is one way a bubble might start. And, to approximate current economic conditions, we'll assume an environment of interest rates that have been low, and continue to be low, for a long time. To start, retail investors may become dissatisfied with their low yields and begin to seek higher yields by purchasing some specific higher-yielding asset. If investors have access to credit, they might try to raise the return on their money by funding a greater portion of their purchases with debt. The asset purchased could serve to collateralize their loan. If many investors employ this strategy and they borrow to invest in the same asset, the price of that asset, and perhaps the prices of closely related assets as well, will increase noticeably faster than the historical trend.

It goes on in this manner incorporating how financial intermediaries might also reach for yield and relax lending standards in light of the rising prices. The second part of her speech is her conception of how the Fed should respond to these bubbles that arise from an extended period of low interest rates:

Some of the significant regulatory tools for addressing asset bubbles--both those in widespread use and those on the frontier of regulatory thought--are capital regulation, liquidity regulation, regulation of margins and haircuts in securities funding transactions, and restrictions on credit underwriting. Without plumbing the depths of each type of tool, I'll say a few words about each as it relates to the curbing of excess credit growth that fuels asset bubbles and to mitigating the effects of a bubble's collapse.

She goes on to detail these regulatory tools and how they might prevent the bubble from getting out of control and causing further economic harm. 

I'm not a Federal Reserve Governor so maybe I'm missing something but I wonder if Ms. Raskin may have missed a more obvious solution to the bubble problem. Since low interest rates appear to be the problem and the Fed has direct control over short term interest rates (which influence long term rates), HOW ABOUT NOT KEEPING INTEREST RATES TOO DAMN LOW FOR TOO DAMN LONG? Rather than construct a Rube Goldberg regulatory machine so the Fed can respond to a problem created by the Fed, HOW ABOUT NOT CREATING THE PROBLEM IN THE FIRST PLACE? Just a thought.

P.S. I'm not sure Rube Goldberg is the proper title for this post. I considered Munchausen syndrome but that didn't seem quite right either. If anyone knows the proper term for an institution that creates problems in order to solve them (other than Congress), please let me know.