One of the most unfortunate tenants of the human condition seems to be a relentless propensity to repeat the same mistakes over and over again. The reason why this persists is because of the consistent hubris of people in positions of power that manage to convince themselves that “This time it’s different” when they are trying to ignore market signals showing a problem and convince themselves that everything is fine.

The most recent example of this hubris was the lunacy that home prices could continue to rise indefinitely, with no disruptions. The most disturbing part of the housing and financial bubble was that there were so many people complicit in the self-deception that any rational perspective was quickly shoved out the door. Consider the fact that banks were financing loans with low to no down payments on the belief that values would continue to rise. Investors were purchasing houses to ‘flip’ at ever escalating prices, expecting values to continue their upward trajectory. Individuals who did not possess anywhere near the financial qualifications to purchase a home were buying more house than they could hope to afford, based on the assumption that they would be able to sell it for a profit if they weren’t able to make the payments.

Following behind this train of self-deception was an army of realtors, mortgage brokers, and construction contractors who were creating massive amounts of income from the fictional bubble. In a strange twist of human arrogance, we can convince ourselves that anything is rational if it is lining our pockets. Nobody stops to ask whether a housing bubble is really a bubble if prices continue to rise. Nobody stops to ask whether a stock market coming off a 25-year bull market can continue to compound at its past rates of return. Nobody stops to ask how the government can finance yet more entitlement initiatives when the present value of unfunded entitlements already exceeds gross domestic product by a factor of seven. (www.usdebtclock.org)

In a perpetual expansion of self-delusions and insanity, humanity continues to argue that “This time it’s different.” This time it’s not a bubble. The government is printing money to finance deficits, but it’s not going to cause inflation. If I invest in this mutual fund, they can out-perform the S&P 500 with no risk. My house is really an investment, so I should buy the biggest one I can so that it will appreciate. Each of these sentiments has been echoed by many people throughout the past few decades, and will begin to be echoed again when the current financial crisis stabilizes.

Stop for a moment to consider how many people have bought into the current “recovery” without question or hesitation. How many people have noticed that the private sector is still contracting, and that growth is only coming from the government spending borrowed money? How many people have noticed that home prices only stabilized because the Federal Reserve flooded the financial system with money, creating the risk of massive inflation? How many people have questioned whether the current practice of spending borrowed money on projects that do not create real production will eventually result in inflation?

It always has and always will be true that people stand willfully blind to things that they do not want to see. Because of this, bubbles will continue to expand, collapse, re-form, and repeat in perpetuity. As an individual, there is nothing you can do to stop these bubbles, but there is quite a bit you can do to benefit from them. By recognizing irrational market behavior, astute investors can position themselves to buy at the extreme lows that follow every market collapse. Investors are currently buying at post-collapse prices, and will become wealthy when the next bubble forms so that they are positioned to pick up more deals after the next inevitable collapse. The fundamental question to ask yourself is whether the next bubble will propel you to wealth or drive you to poverty?