Crude rose 697 percent since trading at $17.45 a barrel on the New York Mercantile Exchange in November 2001. The last time a similar pattern was seen in equities was eight years ago, when Internet-related stocks sent the Nasdaq Composite Index up 640 percent to its highest level ever, according to data compiled by Bloomberg and Bespoke Investment Group LLC.
So, am I comforted that the Fed is going to start looking for bubbles? Perhaps. Assume oil is a bubble. What do you do? I guess one place to start, would be to make sure the anticipated volatility to any oil related positions, at Fed regulated entities, has anticipated the scenario where oil falls back to $17 a barrel in two years. I mean, if the UBS writedown told us anything, it's that at the very least one needs to model an asset moving in the exact opposite path it has gone. And remember that UBS used the past 5 years of history to generate their res mortgage risk, which in this context, would basically assume a symmetric decline in oil is impossible.
The scary thing would be if they started throwing all sorts of limits on markets, or other stupid solutions. The Fed has a lot of smart people. Now, if a congressman said they were contemplating legislation aimed at ameliorating bubbles, I would be really scared. I think it was Alan Blinder who noted that the Fed was efficient because it was kind of immune from the demagoguing in the legislative branch.