Maggie's Farm

Bubbles have existed throughout history, but they do not have to be the norm. The problem has always been when a centralized, or otherwise monolithic authority providing credit or money substitutes.

If there was a legitimate market in money products, the value of various money or equivalents would provide signals to allow people to see if bubbles were actually taking place.

In reality, some of that information is available already, despite this not being the case. Didier Sornette has done tremendous work in this field.

We may not be able to get rid of the Fed, but we can at least tame it somewhat.
http://www.ted.com/talks/didier_sornette_how_we_can_predict_the_next_financial_crisis

I think Didier has some intriguing ideas, but we have to remember centralized management of anything, including adjusting for 'bubbles' is going to lead to unintended consequences. When we run into these unintended consequences, the central authority will seek to minimize those consequences, leading to more consequences, and so on.....

I prefer to think of the idea that bubbles are imaginary. That is to say I know they exist, but while they are bubbling, they are bubbling for a reason. That reason is the irrationality of humans, and the belief that all things interact in a linear, as opposed to asymmetric fashion. When something is rising in price, the obvious bias is to believe it's always going to go up. When it's going down, the bias is to believe it's likely to only go down.

JP Morgan had it right. The market will fluctuate. While the Fed can cause directional biases to be magnified, it can't keep things going in one direction forever.