"the Fed would begin to tighten monetary policy using conventional means

Mark Thoma with another Regulator Approach to stopping bubbles:

"My proposal along these lines( HOW LONG WILL THIS LINE GET? ) (which I am not firmly attached to, just thinking about the implications) is to add a stock price index, s, to the the standard Taylor rule involving output, y, and inflation, p. Thus, the federal funds rate would be set according to ff* = a + b(y-y*) + c(p-p*) + d(s-s*), where * indicates the target value, and then conventional open market operations would be used to hit the federal funds rate target. Thus, whenever stock prices begin drifting above the targeted rate of growth( REGULATOR ), the Fed would begin to tighten monetary policy using conventional means ( THIS IS TOO BLUNT AN INSTRUMENT. YOU'RE CHOKING OFF GROWTH OUT OF FEAR OF A BUBBLE. SAD. ) (ideally, the index s is broad based and constructed with optimal weights rather than being a narrow, value-weighted index like the S&P 500, update: also, the notation is sloppy, but I mean the rate of change in s, "the targeted rate of growth," not the level). The proposal from Roger Farmer, however, is a bit different than this in that it has the Fed controlling the index directly through the "buying and selling blocks of shares on the open market," something I didn't highlight enough in the discussion linked above. With the augmented Taylor rule approach, there is no need to buy and sell stocks, something I think is an advantage. But there can be advantages to direct control as well, e.g. there would be more variation in s under the Taylor rule approach than there would be if s were stabilized directly through buying and selling blocks of shares, so if stabilization of s is an important policy goal, direct control may be preferred."

Here we go.