Robert Engle, Nobel Prize in Economics: “This mini financial crisis will not end in a big crisis”

Robert F. Engle (Syracuse, New York, 80 years old) arrives in Madrid to talk about finances and the climate, but he does not avoid any questions about current economic events: the abrupt rise in interest rates to try to cool the inflationary heat —with the consequent risk of suffocation of growth, of which he warns— to the recent outbreak of financial crisis in the United States. The Nobel Prize in Economics in 2003 travels invited by the Comillas Pontifical University, and does so with a packed agenda, with events in various educational centers and the Bank of Spain. He receives EL PAÍS shortly after a talk at ICADE, in which he develops an idea that is as provocative as it is real: “Putin is a climate activist: he has accelerated decarbonization”.

What follows is a 20-year conversation minutes around a coffee on an afternoon in May that, judging by the heat, could well be July: the weather reality left the deniers without arguments long ago.

Question.* 100007* The conference you have just given is entitled Have the financial markets forgotten sustainability? Is that so?

Answer. No, I don’t think so. What we expected to happen has happened: we have asked energy companies to make their businesses carbon neutral, and that is exactly what they are doing. Oil companies are reducing their fossil investments and, consequently, prices have risen. It is something that we see in the United States and, above all, in Europe, apart from Russia.

P. The oil companies have warned of the risk that investments in exploration and production are not enough to guarantee supply. Can it happen?

R. The reason why they are not investing is because they anticipate that renewables will be able to supply a good part of the energy that we will consume in the future. If they don’t make it on time, they will continue to supply [oil and gas], so I don’t think there is any risk of us running out of power due to lack of investment. Solar and wind power will become cheaper, and fossil fuels simply won’t be able to compete. So we will have adequate energy [from the environmental point of view], and more economical. That is the most likely scenario.

Q.In order to take advantage of all that energy, many uses must be electrified. And you have to do it at forced marches.

R.Yes. Even so, some areas of the economy may need fossil energy. In those cases, you will have to think about hydrogen or the [clean] technology that is more efficient from a cost point of view. There is still an open discussion.

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

R.There is a great appetite for green products and actions. And, at the same time, it is very difficult for a consumer or investor to know clearly what is green and what is not. I don’t know if there is more greenwashing than a few years ago… What is being green? As long as we can’t define it clearly, there will always be greenwashing.

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

R.I think it’s because, at the moment, the most sustainable funds are underperforming the market. So when they say they’re going to be pragmatic instead of green they probably mean they’re not getting as much return as possible. A good part of the rejection of sustainability comes from people who are realizing that low performance on time. It is now easy to criticize these funds, at a time when they are not doing particularly well; back then [when they did outperform the market], it wasn’t that exciting to criticize them…

P.So, this renewed eagerness for “pragmatism”, is it meaningless?

R.They are criticisms that come, especially, from areas that are highly dependent on fossil energy. I think the current rise in [fuel] prices is temporary – it’s the death throes of an era, so at this point I don’t think there’s much point in being so ‘pragmatic’ to use your words.

Engle, before the interview.Samuel Sánchez

P.He was awarded the Nobel Prize for his studies on volatility. If there is something about the economy of our days, it is precisely that…The last three years have been wild: a pandemic, a war, the biggest energy crisis in Europe on record. Would you say 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. What drives volatility is the rapid change in people’s expectations: what they read in the news and how that affects their view of the markets.

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

A.Yes. It is a risk that has been there from the moment they began to raise rates. After the last hike, the Federal Reserve hinted that it would be the last for a while and that it would take a “wait and see” stance. I think it’s something positive; much better than continuing to raise rates. Much of the inflation is due to higher energy prices, collapsing supply chains and a geopolitical element: [the US’s] tension with China. Of those three factors, only the third has not improved.

P. Will there be a recession?

R. I don’t think so. For one reason, above all: deglobalization means the return of supply chains to their places of origin and that will cause [Western] labor markets to continue to adjust. Immigration is not happening as much, a factor that 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 moderate is the ideal for a relative improvement in the well-being of the majority of workers to take place. It is a real possibility.

P. The problems in part of the US banking concern half the world.

R.What we have experienced is a mini financial crisis that has not affected the big banks and, therefore, I believe it will not lead to a major financial crisis.

P. Do you consider this episode closed, then?

R.There are many [US] banks in a high risk situation. 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 that have not surfaced yet, but that investors do recognize. Furthermore, the result of the era of low interest rates is a large volume of uninsured deposits, and that is also a great risk for investors. However, the rate pressure is already slowing and the losses in the bond markets have also abated. I think they will be able to hold out.

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

A.At first the entire regulatory apparatus was tightened, but in the following decade a part of that was undone. Especially during the Trump Administration, which relaxed regulations on the financial sector. What we learned, we forgot later.

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