It is not surprising that across 800 years of economic history, financial crises occur roughly once a decade (Chart 3). Chart 3: Financial crises occur with fairly regular frequency Proportion of countries with banking crises, weighted by share of world income  Sources: Reproduced from Reinhart, C, and Rogoff, K (2013), “Banking crises: An equal opportunity menace”, Journal of Banking and Finance, vol 37(11), pp. 4557-4573  9  All speeches are available online at www.bankofengland.co.uk/news/speeches  9  Creating a unifying framework for macroprudential policy can help to break this dreary cycle, guide policymakers and improve the understanding and effectiveness of macroprudential policy. It can also promote self-reinforcing behaviour within the private financial sector, just as with credible monetary policy. And a clearer framework will improve the transparency and accountability of the FPC to parliament and the people we serve. IV. Grand Unifying Theory of Macroprudential Policy  The FPC is accountable to Parliament for operating the instruments of macroprudential policy to achieve the objectives of macroprudential policy, as determined by the Government. Society chooses the ends, and, within pre-set boundaries, the FPC determines the means to achieve them. The FPC framework mirrors that of the MPC because of the time-inconsistency problems. The (often) long lag between boosting growth today and the damage it does in the future makes an even stronger case for delegating operational responsibility for macroprudential policy to an independent authority than for monetary policy.

The Triumph (and Tragedy) of Monetary Policy  Newton famously and humbly observed, “If I have seen farther, it is by standing on the shoulders of Giants.” So too it is with macroprudential policy, a framework that owes a great debt to insights and initiatives of my predecessor, Lord King. The UK’s macroprudential policy framework today stands on the shoulder of the UK’s monetary policy framework first set up in 1998. In the UK, from 1971 to 1992, inflation was high - averaging 9%, and volatile, with a standard deviation of 5.4%. This distorted price signals, inhibited investment, damaged the productive potential of the economy, and hurt those least well-off. It contributed to high and volatile unemployment, which averaged 7.8% with a standard deviation of 2.8%. Although the value of low and stable inflation was widely recognised, delivering it proved challenging. This was because the instrument that affects inflation most powerfully – monetary policy – also affects output and employment, at least in the short run. This tempted authorities, influenced by governments, to promise low inflation in the future, but then to renege in order to boost activity. Electoral cycles reinforced this predisposition. Firms and households began to anticipate these incentives, and eventually pre-empt them. This time inconsistency was resolved by first having society choose the preferred rate of inflation, and then delegating operational responsibility to the monetary authority to take the necessary monetary actions to achieve that objective. By “tying the hands” of authorities, better outcomes for both inflation and unemployment became possible.