The Federal Reserve Board committee released transcripts of its proceedings in 2006, somewhat to its embarrassment. Participants in the meetings over the course of the year discounted for the most part the possibilities of a housing market downturn. Moreover, they doubted, that should a downturn occur, it would have much collateral damage on the rest of the economy. In a New York Times report on the transcripts, Timothy Geithner is quoted as saying about the housing market, “We just don’t see troubling signs yet of collateral damage, and we are not expecting much.”
The Times also reports that Alan Greenspan retired that year. At his last meeting, in February of 2006, committee members praised him. Geithner said, “That Mr. Greenspan’s greatness still was not fully appreciated." He added to some laughter, “I’d like the record to show that I think you’re pretty terrific, too. And thinking in terms of probabilities, The Times goes on to note that Janet Yellen, another committee member, praised Greenspan saying, “It’s fitting for Chairman Greenspan to leave office with the economy in such solid shape. The situation you’re handing off to your successor is a lot like a tennis racquet with a gigantic sweet spot.”
While analysts have not made the connection, it is likely that praising Greenspan and discounting the impact of the housing market went hand-in-hand. When Greenspan retired many commentators suggested that he was one of the greatest Federal Reserve Board chairmen of all times. Yet in retrospect we know that he oversaw and supported the greatest asset bubble since the Great Depression. Hero worship can hamper clear thinking. It is one specific example of how an interpersonal process can introduce irrationality into group life. A hero may be someone we love but more importantly, the hero is someone we identify with. In Freud’s term, the hero becomes, an “ego ideal.” The ideal symbolizes our own prospect of becoming a hero as long as we are loyal to the image of the ideal we hold in our minds. This helps explain what appear to be Geithner’s sycophantic remarks. He was in effect praising his own and his colleagues’ perspicacity. It was a form of self-praise by association. This also helps explain why committee members were so blind to the calamity unfolding in front of them. Had they taken the warning signs seriously, and the transcripts are clear that they were presented with such signs, they would have been demoting their hero and attacking their inflated sense of self-worth.
The link between the interpersonal process and rational deliberation is a complicated one. A person in a group has to assert herself to make her opinion known and to influence her peers. This process of self-assertion can provoke respect, but it may also stimulate competitiveness. Similarly, a person has to mobilize skepticism to test his peer’s opinions. While being skeptical is one way to take a peer’s opinion seriously, a skeptical remark can mask personal antagonism and communicate a belittling. Hero worship certainly privileges the interpersonal connection above thinking, and at the same time bonds group members together through their shared adulation. The bonding paves the way for groupthink. Beware the group that does not attend to its own group process!