The pitfalls of hero worshipping and exaggerating the importance of others

There is certainty of presence of some human flaws among all of us, one of which is the general weakness to elevate certain individuals to pedestals and exaggerate their importance in the grand scheme of things. This occurs due to variety of reasons; one being that the individual holds a particular position of importance in society. In the process we surrender the competence to exercise our mental faculties to the magnanimity and pre-eminence of such persons.

In her book In the Shadow of Fame about her father Erik Homburger Erikson (1902-1994), the well known psychoanalyst and developmental psychologist Sue Erikson Bloland wrote:

“… for all the life-enhancing potential of putting our heroes on pedestals, from which their power over us is enhanced, there is also the danger of self-restriction in our longing to keep them there. I was constantly struck by the way very successful and competent adults diminished their own sense of importance in the presence of my father in the service of magnifying his. When we grant another person the status of hero, we instinctively minimise our own virtues and strengths to protect his claim to superiority.”

The pitfalls of hero worshipping were aptly illustrated by the spectacular demise of the hedge-fund, Long-Term Capital Management in 1998. The collapse of LTCM was precipitated by Russia’s default on its dollar debt, as the price of its major export — oil — dropped to $11 per barrel, then the lowest it ever was in 25 years.

The Russians were unable to service interest in their accumulated debt. The shock of Kremlin’s default caught Wall Street with its pants down. Dow Jones Index tumbled and according to the then Chairman of the Federal Reserve Bank Alan Greenspan, “the bond markets reacted even more strongly.”

LTCM was founded by two Nobel Prize laureates: Myron Scholes and Robert C Merton. Scholes and Merton, among other things, developed along with the late Fischer Black, the Black-Scholes model for pricing options.

John Meriwether, a former vice chairman of Salomon Brothers and famous bond trader, David Mullins, a former vice chairman of the Board of Governors of the Federal Reserve System and Eric Rosenfeld from Harvard University were also part of the LTCM dream team. Investors placed their irrefutable trust in these men whose sharpness of mind was unquestionable; and they lost badly. LTCM had $1.25 trillion of exposure to derivatives and exotic contracts and banks had exposure of over $120 billion to the fund.

It appears to be human nature to revert to common behaviour when the dust has settled. The year 2007 further exposed the weakness of humans to the lure of what appeared to be an endless boom of the property market in the US between 2001 and 2006. In spite of the warning signs of the dangers of sub-prime, analysts and the market continued to eat out of the palm of “the maestro” as Alan Greenspan was known.

Their actions were dictated to by the so-called Greenspan Doctrine, which meant that asset bubbles could not be detected and monetary policy ought not in any case be used to offset them. The current Chairman of the Fed Ben Bernanke, who was governor the Fed in 2002, endorsed the Greenspan Doctrine when he said before the National Association for Business Economics:

“First, the Fed cannot reliably identify bubbles in asset prices. Second, even if it could identify bubbles, monetary policy is far too blunt a tool for effective use against them.”

This to market participants was an indication that theirs was to exploit the opportunities of the booming property sector in the knowledge that the Fed, in all probabilities, was highly unlikely to intervene. Governor Edward M. Gramlich of the Federal Reserve Bank of Philadelphia had earlier, in 2000, provided some much needed comfort and encouraged market participants when he endorsed subprime lending. He said:

“… Rapid growth (in subprime lending) has given access to credit to consumers who have difficulty in meeting the underwriting criteria of “prime” lenders because of blemished credit histories or other aspects of their profile. This access gives people from all walks of life a shot at the American dream — owning a home and getting capital gains.”

The American dream has since turned into a nightmare for property owners. Alan Greenspan has since stepped down as the Chairman of the Fed and faced a barrage of criticism during the subprime crisis. His cardinal sin, critics claim, was the decision to reduce the Fed funds target to 1%, in 2003 where it remained for a year, was the cause of the property boom and that the reversal of this policy was the cause of subsequent house price declines.

Everyone, including banks who ought to have known better, believed Greenspan in 2005 when he said, “… a bubble in home prices for the nation as a whole does not appear likely …” and they all behaved badly.

However Greenspan refused to accept the blame for the crisis and responded that, “the core of the subprime problem lies with the misjudgments of the investment community.”

At home we continue to see corporates entrust their strategic formulation to consultants, some of whom have questionable credentials and possess no experience even in running a tuck-shop; but there are of course those with impeccable credentials. When things fall apart, we only have ourselves to blame as we minimised our own virtues and strengths in order to elevate and hold another person on a grand pedestal. Even the greatest of men are fallible and susceptible to falter like the rest of us.