David Ignatius nails it, that the idea that the markets, unlike the human beings who participate, are somehow rational actors is wrong.

Actually, he’s quoting Nouriel Roubini, who suggests that rationality from markets which are composed of irrational actors is actually irrational:

“The rational man theory of economics has not worked,” Roubini said last month at a session of the World Economic Forum at Davos. That’s why he and other prominent economists are paying more attention to behavioral economics, which starts from the premise that economic decisions, like other aspects of human behavior, are influenced by irrational psychological factors.

The most compelling rebuttal of the rational model, paradoxically, was delivered by the ultimate rationalist, Alan Greenspan. “I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders,” the former Fed chairman told Congress last October.

That’s why Greenspan didn’t see it coming, argues Daniel Kahneman, a Princeton professor who is often described as the father of behavioral economics. His rational-actor model wouldn’t let him.

The people who have suggested that the market is not self governing and self correcting, and so real regulation from industry, as Ignatius notes, this includes Keynes, are right.