Let's say there's a big bear market and everyone is selling their Tethers on an exchange like Bitfinex. I understand it is pegged to the dollar, but what happens if the price of Tether goes too high or too low above/below $1? Is there some mechanism that corrects the situation?
It should not go anywhere higher or lover then $1. Exchanges should always have enough tether or USD to match any offer. So there is no fear of what you are saying. Tether is USD. It is simple as that.