The Grand Unifying Theory (and practice) of Macroprudential Policy Speech given by Mark Carney Governor of the Bank of England  Logan Hall, University College London 5 March 2020  I would like to thank Daisy McGregor, Nicola Anderson, David Aikman, Caspar Siegart and Victoria Monro for assistance in preparing these remarks and Wayne Chapman, Kate Stratford, Jon Bridges, Matt Waldron and Alina Barnett for their research and analysis. 1  All speeches are available online at www.bankofengland.co.uk/news/speeches  I. Introduction  Economists suffer from physics envy. We covet its neat equations and crave its deterministic systems. This inevitably leads to disappointment. The economy isn’t deterministic. People aren’t always rational. Human creativity, frailty, exuberance and pessimism all contribute to economic and financial cycles. As the great physicist, Sir Isaac Newton, lamented, “I can calculate the motions of celestial bodies, but not the madness of people.” Newton’s exasperation came after he had lost a fortune investing in the South Sea company, or, with the wisdom of hindsight - after he had speculated on a bubble. Just as people can go from rational to “mad” in a boom, theoretical physics itself isn’t quite as neat as Newton had thought, for it has been discovered that Newtonian mechanics break down at the subatomic level. But physicists are not easily daunted. Their hottest fields, such as String Theory, are part of a quest for a theory that unifies Newton and the neutron—a Grand Unifying Theory of Everything that Matters.

More recently, the FPC has taken a series of measures to address potential disruptions to financial services because of disorderly Brexit; to support a smooth transition in benchmark interest rates from Libor to SONIA; to address risks from open-ended funds and have also put in place structural measures to address risks from climate change. 14 As well, both the duration and amplitude of financial cycles has increased since the mid-1980s. For empirical evidence  on financial cycles, see: Drehmann, M, Borio, C and Tsatsaronis, K (2012), “Characterising the financial cycle: don’t lose sight of the medium term”, BIS Working Papers 380; Claessens, S, Kose, M and Terrones, M (2012), ‘How do business and financial cycles interact?’, Journal of International Economics’, Volume 87; and Aikman, D, Haldane, A, and Nelson, B (2013), “Curbing the credit cycle”, The Economic Journal, June. 15 Claudio Borio defines the financial cycle as “self-reinforcing interactions between perceptions of value and risk, attitudes towards risk and financing constraints, which translate into booms followed by busts. These interactions can amplify economic fluctuations and possibly lead to serious financial distress and economic dislocations.” See Borio, C (2014), “The financial cycle and macroeconomics: what have we learnt?”, Journal of Banking & Finance, vol 45, pp 18298, August. 16 This debate is an old one. Arthur Pigou described government as “the trustee for unborn generations as well as for its present citizens”; Frank Ramsey referred to pure time preference discounting as “a practice which is ethically indefensible and arises merely from weakness of the imagination”.