It is my belief that by the time of The Phantom Menace (32 BBY), the Jedi order had become stagnant. They had been without a strong Dark Side enemy for a millennium, and were piling policies and personal limitations upon the "Jedi Code." In a sense, they were building up the Order more as a philosophical religion than an actual peacekeeping force.
Perhaps more important was the fact that they actually became a peacekeeping force. In previous time periods, the Jedi had been soldiers in war. It was in these times--such as the Sith War (approx. 4000 BBY, chronicled in Knights of the Old Republic) and the Yuuzhan Vong War (25-29 ABY)--that the Jedi Order did not have policies prohibiting romantic attachments. Luke Skywalker married Mara Jade in full knowledge of the Old Republic Jedi Order's stance on the issue. Luke remarked that--although he didn't understand how or why--being with Mara felt "right." Considering that Luke was the first of the Jedi after the Force had been brought back into balance--and the fact that he was the catalyst for the redemption of the Chosen One and the end of the Sith--his opinion should mean quite a bit.
In the period of time before the Clone Wars, the Jedi had become stale. With no great conflict to keep them tethered to the natural world, they simply lost touch with reality, becoming more ethereal philosophers than actual warriors. This is notable because the Jedi need to be warriors. After all, they can't keep the peace without fighting for it.
This lack of "fight" may be the problem. Obi-Wan states in Revenge of the Sith that "only a Sith deals in absolutes." This may or may not mean that Jedi do not believe in absolutes (which does not seem to be true, as they often speak of an absolute light and dark), but it most definitely means that they do not always act in absolutes. This may simply mean that they have mercy, and do not always deal out harsh punishment, but it is more likely that they do not actually have any concrete concepts for actions to be taken.
In essence, the Jedi had become lost in their own rampant idealism and religion, losing their common sense. It was only after the New Jedi Order began that the true Jedi way was accepted. Qui-Gon Jinn was truly the only "true" Jedi Knight seen in the Star Wars prequels, with the possible exception of pre-Dark Side Anakin.
Of course, the truth is that the KOTOR and NJO eras were filled with war and darkside conversions. Does that mean that the Jedi of the prequel films were correct in their overly restrictive philosophy? After all, if not for the Sith secretly lying in wait for a thousand years, perhaps the Jedi would not have fallen; it's not as if too many Jedi were actually turning to the Dark Side during that time.
However, it's my belief that the Star Wars galaxy simply must be at war. History in the Star Wars universe is cyclical; a neverending loop of light and dark struggling against one another. If the stars aren't at war, something's wrong.