"Specifically, the US Congress needs to alter the Fed’s policy mandate to include an explicit reference to financial stability."

How might the Fed prevent bubbles, if it should? Here's Stephen Roach in the FT:

"The new mandate would also encourage the Fed to deal with excesses by striking the right balance between deploying its policy interest rate and other tools. In times of asset-market froth, I favour the “leaning against the wind” approach with regard to interest rates – pushing the Federal funds rate higher than a narrow inflation target might suggest. But there are other Fed tools that can be directed at financial excesses – margin requirements for equity lending as well as controls on the issuance of exotic mortgage instruments (zero-interest rate products come to mind). In addition, the Fed should not be bashful in using the bully pulpit of moral persuasion to warn against the impending dangers of asset bubbles.

Of equal importance is the need for the Fed to develop a clearer understanding of the linkage between financial stability and the open-ended explosion of derivatives and structured products."

We've encountered these proposals before:
1) Raise rates to slow economy ( Problem: Blunt instrument, hurts whole economy, hard to do exactly )
2) Higher capital requirements ( Problem: Need to determine for each investment )
3) Not allowing some investments ( Problem:Who chooses? Why? )
4) Tell me to watch out ( Problem: Who cares? )
5) Try and figure out how certain investments can cause instability ( Problem: Easier said than done )

My problem is that these proposals seem to concern the current crisis. We would seem to need to develop principles that can catch and capture future innovation in investment instruments.

As I've said, I favor examining, not necessarily regulation, investments that shift risk to third parties or magnify risk, making collateralization hard to determine. Problem: I've no idea how to do it.

One good point made by Bob McTeer: If the Fed is supposed to do this, we might want to tell it, and give it the resources to make a stab at this task actually possible.