Robert F. Engle, Nobel Prize in Economics: ‘This mini financial crisis will not end in a big crisis’

The US economist criticizes the loosening of regulations under Trump and discusses the risk that central banks will go too far with rate hikes

Robert Engle
Robert Engle, on Wednesday in Madrid.Samuel Sánchez
Ignacio Fariza

Robert F. Engle, 80, was recently in Madrid to talk about climate finance, but he also answered questions about current economic events, including the sharp rise in interest rates to curb inflation and the recent financial crisis in the United States. The winner of the 2003 Nobel Prize in Economics traveled to Spain to be a keynote speaker at a conference organized by Comillas Pontifical University. Engle, who had a packed agenda with events at various educational centers as well as the Bank of Spain, talked to EL PAÍS after speaking at the ICADE business school, where he put forward an idea that is as provocative as it is real: “Putin is a climate activist: he has accelerated decarbonization.”

Question. You gave a lecture called Have Financial Markets Forgotten Sustainability? Do you believe they have?

Answer. No I don’t, actually. What is happening is what we should have expected: we have asked energy companies to make their operations more carbon neutral, and they are behaving as if they have accepted this. They are reducing their fossil investments and, as a consequence, the prices have gone up. It is something that we’re seeing not only in the United States but also in Europe, influenced by Russia.

Q. Oil companies have warned of the risk that investments in exploration and production will not be sufficient to guarantee supply. Can that happen?

A. The reason why they are not investing is because they foresee that renewables will supply a good part of the energy that we will need in the future. If renewables don’t come online in time, these will continue to supply [oil and gas], so I don’t think there is any risk of running out of fossil energy due to lack of investment. What should happen is that we will have cheaper and cheaper renewables like solar and wind, and fossil energy companies simply won’t be able to compete. So we will have perfectly adequate electricity [from the environmental point of view], and cheaper. That is the most likely scenario.

Q. In order to take advantage of all that energy, many things must be electrified, and fast.

A. Yes. Even so, parts of it that cannot be electrified may still need fossil energy, or maybe you’re going to use hydrogen. There’s a question of whether the technology is going to make that cost effective.

Q. We live in an era of greenwashing: all companies want to present themselves as sustainable, whether or not they are.

A. There is a big appetite for green stocks and green products. And it’s very hard to tell if you’re an investor or a consumer which things really are green and which are not. I don’t know if there is more greenwashing now than before... The difficulty is that it’s unclear exactly how you measure that. What does it really mean to be green? As long as we can’t tell, greenwashing is always kind of inherent in this.

Q. The largest fund manager in the world, BlackRock, has gone from being the leader in green investment to focusing on security in all its forms. Is it an isolated case or can it become a trend?

A. I think it’s because, at the moment, the most sustainable funds are currently underperforming. So when they say they’re going to be pragmatic instead of green it might just mean they’re not getting the most out of the market. We’re seeing pushback on sustainability from people who are noticing this underperformance. It is easy to criticize these funds, at a time when they are not doing particularly well; as long as they were performing well, it wasn’t that exciting to criticize them.

Q. So, is this renewed desire for “pragmatism” meaningless?

A. The pushback comes especially from people in parts of the world that do a lot of fossil energy extraction and processing. But I think the current rise in energy prices is temporary: it’s the death throes of a sector, so at this point I don’t think there’s much sense in being “pragmatic.”

Engle, before the interview.
Engle, before the interview.Samuel Sánchez

Q. You were awarded the Nobel Prize for your studies on volatility. If there is one thing that describes today’s economy, it is precisely that... The last three years have been wild: a pandemic, a war, the biggest energy crisis in Europe for as long as there are records. Would you say that we are going through one of the most volatile periods in modern economic history?

A. I don’t think so. In the markets, volatility was higher during the financial crisis. Also in the late 1990s, with the collapse of the technology sector [the dot-com crisis]. And, even further back, the Great Depression was an extremely volatile period for stocks. There are always periods of high and low volatility, and what really drives volatility is how fast people’s expectations are changing: what they read in the news and how that affects their views of the markets.

Q. The latest inflation data in the US is somewhat better than expected. Is there a risk that central banks will go too far with rate hikes and end up choking the economy?

R. Yes. It is a risk that we have been talking about ever since they began to raise rates. After the last hike, the Federal Reserve hinted that it might be the last for a while and that it would take a “wait and see” approach. I think that’s a good thing, much better than continuing to raise rates. I feel that much of the inflation is due first to energy prices, second to the supply chain collapse and third to a geopolitical element: [the US’s] tension with China. Of those three factors, only the third has not improved.

Q. Will there be a recession?

A. I don’t expect a recession. The main reason is that if what we’re doing is deglobalizing, meaning bringing back all the supply chains to their home countries, and you’re seeing a lot of protectionism in the legislation that’s going on, then we have to expect higher prices and a tighter labor market. We’re not letting in as many immigrants as we used to, which would help loosen those job markets, and there are reasons to think that wages will continue to rise. And a scenario in which wages rise and prices begin to come down is ideal for an improvement in the relative welfare of different income groups. It is a real possibility.

Q. The problems experienced by some US banks are of concern in many parts of the world. Is this a mini financial crisis?

A. I think it’s a mini financial crisis that has not exposed the big banks. I think it will not lead to a financial crisis.

Q. Do you feel it is over?

A. There is elevated risk in a lot of [US] banks due to a combination of things. One is that they have invested in assets that were considered perfectly safe by regulators, such as long-term bonds, but are not really safe in a rising interest rate environment. That leaves them with a large volume of capital losses on their books that were not yet realized but that investors recognized. Furthermore, the result of the era of low interest rates is a large quantity of uninsured deposits, and that is also a big risk for investors. However, if the pressure to raise interest rates has stopped, the losses in the bond market will also abate. I think they will be able to hang on.

Q. Have we learned any lessons from the global financial crisis 15 years ago?

A. We’ve learned that if you’ve got losses, whether reported or unreported, as a bank you need to raise capital. It reinforces what we saw during the financial crisis, where the asset side of the balance sheet failed. After the financial crisis, we tightened our regulatory apparatus, but over the next decade we undid that, especially under the Trump Administration, which relaxed regulations on the financial sector. What we learned, we later forgot.

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