Bear with me here. This is going to be one of those "out there" posts. But Steve Randy Waldman takes an interesting stab at a problem I've been wrestling with, at least in the furthest reaches of the financial corner of my brain, since the financial crisis began.

And that is how to stimulate the economy without creating another asset bubble. It sounds easy enough to the Keynesians, but as Waldman has pointed out before, rebooting aggregate demand through traditional government action may simply create another bubble. And ultimately, the distinction between monetary and fiscal policy may be moot.

This brouhaha over the Boston Fed's rationalization for missing the housing bubble reminds me of a conversation I overheard a few weeks ago between a former Federal Reserve bank supervisor and his counterpart at the New York Fed.

I can't give you their names since they were conversing privately a few feet away from me before the start of a conference on financial regulation (nor can I give you the name of the confab since that would give their identities away), and I just managed to overhear the exchange.

This piece published today by Project Syndicate is as insightful a critique as I've seen of the consensus that has emerged among policymakers that government deficits must be cut to restore economic growth.

Not that we haven't taken a stab at that ourselves.

A panel sponsored by the Securities Industry and Financial Markets Association on Monday on what banks can expect from financial reform warned that higher capital reserves and other limits Congress imposes on their profitability would hurt the economy as they curbed their ability to lend.

Several panelists, including Adam Gilbert, head of regulatory policy in the corporate risk management group of JP Morgan Chase, and Gary Mandelblatt, chief risk officer of Nomura, warned repeatedly of such "unintended consequences" from financial reform.

Anyone who thinks the Federal Reserve ought to oversee systemic risk ought to take a close look at this article.

By now, of course, it's no surprise that banks used yet another financing gimmick to make their capital look stronger than it really was. This one, involving Trust Preferred Securities known as TruPS, is doubly gimmicky, in so far as it involves both hybrid securities (i.e., a have your cake and eat it combination of debt and equity) and off-balance-sheet treatment. In terms of magnitude and significance, this stuff makes Andy Fastow look like a piker. Then again, Enron violated the letter as well as the spirit of the accounting rules. The banks were smarter than Fastow in that respect, or at least their lawyers and lobbyists were.

Paul Krugman's column today called my attention to a paper that anyone interested in financial reform should check out.

The paper completely contradicts the conventional wisdom that innovation in finance is a good thing.

I have to say that today's House Financial Services Committee hearing into Lehman Brothers' collapse leaves me confused in more than one respect.

Ben Bernanke told the committee that regulatory authority over Lehman rested with the Securities and Exchange Commission under a voluntary program set up in 2004.

The surprise discount rate increase last month and the FOMC  discussions over when to begin reducing its balance sheet have really highlighted the importance of transparency in how and when policymakers plan to return things to normal -- whatever that normal may be.

Whenever there is any perceived shift in fiscal or monetary policy, there is a quick reaction in debt market spreads. The current lack of a clear exit strategy is creating its own volatility in the markets.

The fact that banks are once again able to raise capital is a very positive sign for US markets, however asset quality issues must still be addressed and more losses are on the horizon. As such, the timing of exits from stimulus programs by the government and US Treasury is essential, and market participants around the world – particularly those in the securitization and structured finance spaces - are watching closely as policymakers start to look at winding down support programs, selling off assets and re-evaluating fiscal and monetary policies.

How and when programs are closed and assets sold are of critical concern both to issuers and investors as it could have a big impact on tenuous market stability. With Fed officials arguing at the Federal Open Market Committee meeting in late January over when to start selling off some of the assets making up their $2.26 trillion balance sheet, that impact could be tested sooner than anyone thought likely.

Whether a Treasury-led council of bank regulators would be more or less effective at heading off systemic financial risk than the current set-up remains to be seen.

But it couldn't be much worse. So the nonsense that St. Louis Fed President James Bullard told the Times today about the Fed's role in the financial crisis needs to be called just that.