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Dear Prudence, the Sun is Down

Few things I've read of late better capture the prevailing mindset during the housing boom than this comment by an investment firm executive from today's WSJ piece on the banking crisis (subscription required):
"Under most scenarios, they were good and prudent investments -- as long as we didn't have a housing or banking crisis," says John Stein, president and chief operating officer at FSI Group LLC, a Cincinnati company that invests in financial institutions.
It's also nice to lay out in the sun as long as it doesn't start to pour. Not to pick on Mr. Stein, but it's this total negation of common sense that sets people clucking. Because obviously an investment can't be "prudent" unless it, you know, prudently allows for the occasional thunderstorm.

Tighter government regulation and shrewder central banking offer some corrective to this sort of thinking, or at least can partly control for its adverse effects. But not much, I suspect.

As anyone with a passing knowledge of economic history knows, booms distort perception, which in turn addles the brain. Tulips shine like diamonds. Seas boil with the promise of limitless profit. Euphoria, as puncture-proof as a subprime mortgage, reigns. At least until panic and despair come barreling in like boozy party-crashers.

Under most scenarios.

Image courtesy of Flickr user Shivayanamahohm