To the majority of banks, the environment of contagious optimism makes more and more proposals seem bankable. Ever less attention is paid to potential problems as the cautious voices appear curiously quaint and have little quantitative support because all the recent news and facts are favorable. Even the supervisors and policymakers tend to be caught up by the process.
Their voices of caution are rarely raised because they, too, find it difficult to make a case for restraint because the quantitative indicators do not support caution until too late in the lending expansion. As cyclical imbalances inevitably develop, the typical pattern has been an evaporation of optimism among lenders and asset holders and a herdlike propensity to seek an increase in risk premiums.