It's amazing how we suddenly have economic experts everywhere.
As to the profusion of experts, I for one blame clusterstock.
Now Dr. Waterhouse is no Dr. Krugman (or for that matter Henry Blodget), but this is my view:
Probably the best way to even out the irrational peaks and valleys of the stock market is to ban or restrict buying on margin. If people, much less for the love of God banks, are allowed to run up debts in the handling of securities which they cannot possibly repay, then there's going to be forfeitures when the securities fall in value. We're now in the circumstances where basically those forfeitures are too large for the market to bear and so the government thinks it cannot allow them to occur, but at the same time the total amount of these shortfalls are so large they're really
notional in value, which is to say they involve more money really than even the government can pay, or can possibly even exist. Really: one hears numbers on the basic cable news shows being thrown around now so large I only think I've ever used them trying to explain to a six-year-old how big the universe is.
Eliminating or restricting margins helps, even when we're dealing with securities that are otherwise compromised or weird, like securitized mortgages or credit default swaps or that most awesome of them all, the swaption.
I don't have the background for my own analysis of the root causes of the actual Depression and in the end that's what you need to solve, not just the market symptoms of that Depression, even though they aggravate the problem. To my understanding the economies of the 1920s were creating more products than they were consuming, and we can attribute this to any number of causes, several of which are probably right. A free marketeer will tell you that even before Smoot Hawley jacked up the tariffs, so many governments in the world were operating on mercantilist principles and encouraging domestic industry and discouraging imports that there was nowhere for the extra produced goods to go. (A tariff, by definition, makes it harder to be a consumer than to be a producer.) A progressive view would be that income inequalities kept the great mass of consumers from being able to afford all the goods being produced.
So a combination of trade deals to lower barriers, refundable tax cuts at the lower end of the income ladder (I'm not sure quite how the income tax worked that early on), and a well-timed infusion of social welfare and infrastructure spending could have been just the ticket to ease the economy away from the structural imbalances before things got out of hand.
And let's not forget restrictions on margin buying. But the great problem is that at the peak of the boom no one wants to do that sort of thing. So the changes you would want to make would probably have to be at the front end of the 20's.