Having written all that, I must admit that there is some soul searching going on in the economics profession. As obvious as the financial crisis seems after the fact, few economists saw it coming (with some notable exceptions). Virtually none anticipated how severe it might be. In the fall of 2005, several prominent economists wrote in a prestigious journal, “As of the end of 2004, our analysis reveals little evidence of a housing bubble.”
Wrong. Actually the article was worse than wrong, because it was written explicitly to refute the signs of a bubble that had become obvious to many laypeople—which is kind of like the fire department showing up at a house with smoke wafting from the roof and declaring, “No, that’s not a fire,” only to have flames start leaping from the attic twenty minutes later. There was a bubble. And it can be explained best by incorporating psychology into economics, namely the tendency of individuals to believe that whatever is happening now is what’s most likely to happen in the future.

We had a bubble in housing.

So I am skeptical about the argument that the subprime mortgage problem will contaminate the whole mortgage market, that housing construction will come to a halt, and that the economy will slip into a recession. Every step in this chain is questionable and none has been quantified. If we have learned anything from the past 20 years it is that there is a lot of stability built into the real economy.

After the mid-1990s, there was hardly a technical distinction to be made anymore between high-risk borrowers and everybody else in the casino atmosphere of [North] America[n] society. No one was at risk anymore because, in the something-for-nothing economy, it was impossible to be a loser. Or so went the herd thinking. […] It is… likely that the housing bubble will have begun to come to grief.

We're in a bubble. We have artificially low interest rates. We have a stock market that, frankly, has been good to me, but I still hate to see what's happening. We have a stock market that is so bloated. Be careful of a bubble because what you've seen in the past might be small potatoes compared to what happens. So be very, very careful.

the worst real estate crashes in history! And on the surface, it looks like you’d probably put this in your Risk Bucket. But here’s why I think it’s a safe investment: in 2008, when the real estate market just went through the floor, and the world was upside down, the prices of houses in most parts of the United States dropped 30% to 40%, max. There were a few exceptions, such as some parts of Las Vegas, Phoenix, and Miami, where the prices dropped more than 50%.

Bubbles aren’t so much about valuations rising. That’s just a symptom of something else: time horizons shrinking as more short-term traders enter the playing field.

I bought a house in a depressed neighborhood. The prices weren’t low, but the people were all bummed out.

It’s incredible,” he says, “this moaning pessimism, this knee-jerk, things-are-going-downhill reaction from people living amid luxury and security that their ancestors would have died for. The tendency to see the emptiness of every glass is pervasive. It’s almost as if people cling to bad news like a comfort blanket.

Pessimism is a very easy way out when you’re considering what life really is, because pessimism is a short view of life. If you look at what is happening around us today and what has happened just since you were born, you can’t help but feel that life is a terrible complexity of problems and illnesses of one sort or another. But if you look back a few thousand years, you realize that we have advanced fantastically from the day when the first amoeba crawled out of the slime and made its adventure on land. If you take a long view, I do not see how you can be pessimistic about the future of man or the future of the world.

It's incredible," he says, "this moaning pessimism, this knee-jerk, things-are-going-downhill reaction from people living amid luxury and security that their ancestors would have died for. The tendency to see the emptiness of every glass is pervasive. It's almost as if people cling to bad news like a comfort blanket.

A pessimist is somebody who complains about the noise when opportunity knocks.

Everybody knew there was a housing bubble. You'd fucking go to a neighbor, "Gee, that house costed $60,000 last year, and now it costs $600,000?! What did they do?!" "Well, they put a gazebo in the back."

Don’t partner with pessimists