BIS central bankers’ speeches  3  The game of guessing what everyone else is guessing (everyone else is guessing…) was familiar to Keynes who observed that too often investors “devote [their] intelligences to anticipating what average opinion expects the average opinion to be”. 6 This disconnect between decisions and fundamentals feeds market volatility and capital misallocation. Such “beauty contest” dynamics afflict not only sophisticated investors, but also many mortgage lenders and homebuyers, particularly during a “new era”. If house prices can only go up, it’s possible to borrow large multiples and pay off future obligations with the capital gains that will almost surely follow. Such “rational” behaviour fuelled the credit binge that ultimately led to the global crisis. Second, if markets always clear, they should possess a natural stability. Evidence to the contrary must be the product of market distortions or a result of incomplete markets. Much of financial innovation springs from the logic that the solution to market failures is to build new markets on old markets. 7 Progress through infinite regress. During the Great Moderation, such thinking became an organising principle for financiers and policymakers. The latter pursued a light touch regulatory agenda in quest for the perfect world of complete markets first described by the economists Arrow and Debreu. 8 Their world imagines self-interested, atomistic agents, coolly calculating odds over all future possible states of the world, writing and trading contracts with each other, all frictionlessly enforced, all achieving mutually beneficial – indeed socially optimal – outcomes.

But more is needed. Individuals need to be held more to account for their actions. Doing so will require new common standards, cast in clear language, better training and higher qualifications, and ways to ensure that when employees are fired, their history is known to those who consider hiring them. Firms must take responsibility for the system by improving the understanding of acceptable trading practices. The industry has already taken the lead by establishing a new FICC Markets Standards Board that will establish common standards of market practice that are well understood, widely followed and keep pace with markets. Regulators need to take a tough line on market abuse, including extending criminal sanctions to every corner of currency and fixed income markets. And to consign the Age of Irresponsibility well and truly to history, London, as the largest global market, must lead the development of global standards. With the main building blocks of reform in place, now is the time to take stock. It’s vital that we – public authorities and private market participants – work together to reverse the tide of ethical drift. This cannot be a one-off exercise; we need continuous engagement so that market infrastructure keeps pace with market innovation. This November, the Bank of England will hold an Open Forum at the Guildhall. The programme, published tomorrow, has been developed not just by policymakers and market participants, but also representatives of well-known companies, trade unions, academia, the media and civil society.