Where’s the proof of wisdom in the markets?

I AM intrigued by regular suggestions that we must heed “the market” in regard to such matters as banks’ capitalisation.

The market did not “know” Ireland was in a property bubble and that the banks were in very dangerous territory for some years as they gave 100% residential mortgages and lent unknown but clearly large numbers of billions to property developers. This was in spite of quite a few commentators of some standing warning about such recklessness for several years.

It is well known that markets are driven by fear and greed, by irrational exuberance as noted by former US Federal Reserve chairman Alan Greenspan, and by panics. Markets are affected in their operation by extremely ruthless people in pursuit of “wealth creation” and by highly leveraged techniques. The recent suggestion by researchers that dealers are affected by emotional disturbances seems apt to me. I believe markets often represent not a fount of wisdom but group psychology at its most complex, irrational and error-prone.