Mark Carney: The grand unifying theory (and practice) of macroprudential policy

Speech by Mr Mark Carney, Governor of the Bank of England, at University College London, London, 5 March 2020.

The views expressed in this speech are those of the speaker and not the view of the BIS.

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. One that can explain the motions of both heavenly bodies and subatomic particles.