Can we blame Alan Greenspan for failing to take action during the bubble economy of 2002-2007? The basic evidence presented earlier would indicate that we could. But, I'd like to point out a few things that might make us change our mind.
The first is the very nature of inflation itself. Inflation is especially bad to a lender, and actually pretty kind to a borrower. If the value of the dollar is falling (inflation), then the value of a loan is also falling, and the balance sheet of a lender is taking a hit. This seems to me a primary reason that banks hate inflation, and why congress has given the Federal Reserve a mandate to keep it under control.
The second is the falling stock market. During the period from late 2000 into 2004, the stock market was in a generally downward trend. It was coming off its unsustainable highs of the late nineties, when p/e ratios had risen to over 40 to 1. The stock market value should track fairly closely with the economy has a whole: The value of a stock is exactly the expected future value of its dividends, and those in turn, in the aggregate, are a reading of the future value of the economy. Unless the economy is growing at 8-10%, the Dow Average shouldn't be, either.
And the third reason is what would have happened if Mr. Greenspan had taken stronger action, especially by raising the interest rates. First off, he would have slowed economic growth even more. Second, he would have lowered the value of the dollar, diminishing exports. And third, he would have caused many Americans to lose their jobs.
And, if he had done as Joseph Stiglitz advocates by controlling the 'liars loans', and the complex derivatives, he would done even more to raise the ire of the nations new wealthy.
As if the uproar that would have come from all of that wouldn't have been enough, he would have trampled, at least to some degree, the profits of the financial industry who were busy creating new debt instruments and enriching themselves by taking an ever larger share of the new money that was being created. I think that Mr. Greenspan would have found himself thrown out of office, and vilified for damaging an already 'weak' economy. Alan Greenspan had very little (if any!) incentive to do the things that needed to be done.
So, blaming the individual, although it often makes us feel good, is counter-productive in this particular case. Instead of holding out hope that the 'right' individual will be able to make the system work, we need to blame the office. And, it appears that we need a change in the office of the Federal Reserve so that it's chairperson can be the regulator that we need them to be to oversee a sustainable economy. I would be very curious to see ideas and debate on how Congress (for the Reserve is a creation of Congress) could change the charter of the Federal Reserve to strengthen it so that it supports the interests of all America, rather than just the Financial Sector.
Sources:
http://www.the-privateer.com/chart/dow-long.html
http://www.prospect.org/cs/articles?article=after_the_fall
http://www.vanityfair.com/magazine/2009/01/stiglitz200901?currentPage=1
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