Lunacy is behaviour so wild it looks like madness. Used almost entirely about decisions rather than about people.
That is the modern use, and calling a policy sheer lunacy is a criticism of the thinking rather than a diagnosis. The older sense was literal and legal, since a lunatic was a formal category into the twentieth century, and both words come from the moon, from the belief that madness followed its phases. Applied to a person today either word is unkind and inaccurate.
1nounlunacyExtremely foolish or reckless behaviour.
“Selling the building was economic lunacy.”
Also accepted in games: madness, insanity
From lunatic + -acy.
Etymology from Wiktionary, CC BY-SA