It is only halfway through November but I think we can already declare the winner of the 2007 Quote of the Year competition. It is Chuck Prince, the former chairman and chief executive of Citigroup (NYSE: C - News) .

"When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing," Mr Prince told the Financial Times on July 10.

Pithy, punchy and, following his "retirement", poignant. Bravo!

Mr Prince, as we now know, called the top of the market with virtuosity. Three weeks later, Bear Stearns (NYSE: BSC - News) convened its infamous conference call in which it unnervingly assured investors that it remained solvent and its chief financial officer declared that conditions in the credit market were the worst he had seen in 20 years. It has been downhill ever since.

Mr Prince is limping off the dance floor with his party bag of $42m (€28.6m) in shares and benefits, large parts of which, as I said last week, he does not deserve. He has been reviled by outsiders and rivals as a fool for having compared banking to dancing: even Citi's loyalists flinch at the recollection of his words.

As Mr Prince departs, however, it should be noted that his statement was not, as history will record it, idiotic. His offence was not that he misunderstood or misstated how banks have operated over the past few years but that he blurted out the truth rather too openly.

Note that he did not say "if" the music stops but "when". He recognised then - as did others - that the period of extraordinarily easy money that had prevailed since 2002 was bound to end. He also correctly predicted that, in terms of liquidity, things would get tricky, as Citigroup, Merrill Lynch, Northern Rock and now E-Trade can testify.

Nor do I think we should mark Mr Prince down for being evocative. Perhaps he should not have suggested that bankers were getting carried away by the intoxicating rhythm of cheap credit, but it was true. In this era of bland management-speak, vivid honesty is admirable.

That brings us to the crux of Mr Prince's remark: "As long as the music is playing, you've got to get up and dance." In other words, as long as conditions in financial markets are alluring, banks have no choice but to plunge in - even if they realise that dangers lie ahead.

It is worth reflecting soberly on this point because Mr Prince was not a renegade. He was doing his best to express, a bit too plainly as it turned out, the strategy pursued by Citi and its Wall Street rivals.

This point was brought home to me the other day when I was talking about the credit squeeze with the head of another bank. The lesson he drew from the turmoil, he said, was not that his institution should have avoided leveraged lending and structured credit. It could not have, he said, because it would have offended customers such as private equity funds and its revenues would have lagged behind its peers.

No, he said, the moral was that his bank had to be on alert for the moment that an overcrowded market started to crack up and be adept at getting out in time. Banking in the 21st century involves nipping into all areas of financial markets where there are large fees and high yields and rushing out at the first signs of trouble. Ripeness is all.

From the executive suite of a publicly quoted bank, this is logical. A bank must garner the revenues it can for as long as they last and hope that its risk management techniques are good enough to avoid trouble. Some investment banks, such as Goldman Sachs and Lehman Brothers (NYSE: LEH - News) have, so far, largely done so.

But it invites disaster for the industry as a whole because, when every bank tries to pull out of a fragile market at the same time - a phenomenon that occurs as soon as the first one breaks for the exit - some of them will get stuck. When everyone turns from buyer to seller, liquidity evaporates.

The phenomenon was at work in 1998 when Wall Street trading desks lined up with the trades devised by Long-Term Capital Management, the hedge fund. After the Russian debt crisis, buy-orders dried up in all corners of markets at once and Long-Term Capital collapsed.

It has reappeared even more viciously this year, leaving banks unable to value, let alone to trade, structured credit securities. Some have survived the turmoil; others have barely done so.

The industry's tendency to succumb to the madness of crowds invalidates a lot of risk management models, which under-estimated the probability and size of losses in highly stressed markets, as they did in 1998.

Thus a more exact analogy for how banks behave is a game of musical chairs rather than a dance. When the music stops, as it regularly does, there are not enough chairs for all of them to be seated again.

Many bankers knew this before August and Mr Prince may have had intimations of mortality on July 10 - he was already under a lot of pressure. But everyone has been taken aback by the ferocity with which illiquidity has struck credit markets and the chaos and career damage that has resulted.

They should not be surprised. If an industry operates on the principle that each bank steadily ratchets up its risk-taking and relaxes its lending standards in the hope of escaping before the others, periodic financial debacles are inevitable.

Memories in financial markets are short and, when the music starts up again, many banks will be back on their feet dancing to some new tune. But maybe one or two will remember Mr Prince's remark and remain seated. We can only hope.

john.gapper@ft.com