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CASE STUDY The Role of Groupthink in the Financial Crisis When an organization's leaders and members listened. As White later said, "Somehow every allow themselves to be captured by their own body was that it wouldn't go down as All the ingredients of the financial crisis were lize or ignore warn Companies of America, a trade association of U.S beliefs, they see only what they want to see. long as you don' back loop develops that increasingly biases the known by the central bankers more than two years interpretation of information and distorts reality before the crisis began. The Mortgage Insurance Group members may rationo ing signs that are in conflict with closely held mortgage providers, even sent a letter to Alarn iefs and develop illusions of invulnerability Greenspan expressing its strong concerns about Many historians now feel that aspects of these risky mortgage lending practices and speculating processes are a core explanation for the exces that the Fed might be using incorrect data. But the sive credit expansion that fuelled the 2007 sub data and warnings were ignored because the prime mortgge meltdown and subsequent economy was doing well and billions in bonuses were being awarded on Wall Street. No one was financial crisis In the years leading up to the financial crisis, anxious to break up the party. When Ben Bernanke clear warnings of impending problems were succeeded Greenspan in early 2006, he also ignored. The revered chairman of the U.S. Federal ignored the warnings. Even as the financial crisis Reserve Bank, Alan Greenspan, was a strong began, Bernanke downplayed the risk of the trou- advocate of the free market and supported minimal bles spreading further. We now know that the trou market intervention, He was also known to be bles and concerns highlighted by White and others unwelcoming to challenges to his ideas. As Wil rocked the foundations of the global economy liam White, the chief economist for the central To decrease the chances of groupthink under- bank of all central bankers, the Bank for Interno- mining the financial industry again, some experts tional Settlements, recolls, "Greenspan always have suggested increasing the diversity of senior demanded respect."44 And who could question management and among those developing prod Greenspan? He was an economic superstar and ucts that affect the risks in the financial system everything was going well. As White further states, Because similar people (age, race, education "When you are inside the bubble, everybody feels gender, etc.) tend to think in the same way, per fine, Nobody wants to believe that it can burst. "45 haps people from different backgrounds would be more willing to question ideas and counter the White was the only central banker in the world willing to challenge or criticize Greenspan effects of groupthink and his ideas. White predicted the approaching financial crisis years before it happened and pre dicted everything Greenspan believed. Despite nd his team's persisient criticism of the age securitization business, explanations of the perils of risky loans, and provision of evidence about the rating agencies' lack of credibility, few sented a paper to the central bankers that contra 1. How were the elements of groupthink illus- 2. What could be done to reduce the effects of 3. Do you think that increasing the diversity of trated in th groupthink in the future? the financial companies' leadership would reduce groupthink? Why or why not? in the highly secretive world of central bankin g