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Regulators Were Appointed to Be Asleep at the Wheel

Question: What can we learn from the recent financial crisis?

Robert Engle:
Right. So, I think we’ve learned a lot from this crisis.  And I think one of the things is kind of what we’ve been talking about.  That when firms take a lot of risk, to some extent, they’re taking risk beyond what they feel themselves.  In other words, when large companies take on risk, then they impose risks on the rest of the system.  And these are systemic risks and these systemic risks we never used to think were really that important, but as soon as we recognize how the financial sector – the risks the financial sector takes on can impact the entire global economy, we realize that those risks needed to be controlled for the social good.  And reduced the systemic risks. 

So we have a new push to understand systemic risk, where it comes from, how do you measure it, how do you regulate it.  And the financial regulation that has been discussed for a year in the U.S. and which is about to be put into place, I think, and which is being discussed in Europe and everywhere, the focus is very much on systemic risk that those are the risks that you want to spend most of your regulatory time worrying about.  So that leads us to regulating more carefully the largest or the most systemic risky companies and institutions.

Question: Is deregulation effective for financial markets?

Robert Engle: I think we’re fooling ourselves if we think that regulators are going to be able to outsmart the bankers.  So, the task of designing regulatory reform is trying to make more or less foolproof regulation and that’s one of the advantages of the systemic category where, if you can **** that some smaller number of banks or financial institutions are the ones to worry about, then you can give them more scrutiny and more attention, you don’t have to have rules that apply to everybody.  And I think that you can do sort of what the Fed has often done, which is said – called “leaning against the wind.”  In other words, if you think that there’s too much risk being taken and that the financial sector is being super heated, you can actually increase the capital requirements at that point. 

When Greenspan, who’d had no appetite for regulating risk thought that things were getting out of hand, he coined the phrase “irrational exuberance” to cover it.  But all he had was talking points.  And with this new regulatory environment there would be more than talking points, there would be things that could be done.  I do think that the reason the regulators were asleep at the switch in part was because we have had so much success in the U.S. history with deregulation, it’s done valuable things for the trucking industry, for airlines, for telecommunications.  We’ve expanded deregulation, gotten government out of one sector after another and I think that the Greenspan approach and the Cox SEC were in that tradition of let’s deregulate and see what these markets do.  And one of the things they immediately observed is that these markets took off.  But they took off by taking more and more risk, which it turned out to be risks that the taxpayers were really taking. 

So I think what we’ve learned is that deregulation is not as effective in the financial sectors where at least it can’t go as far in the financial sectors as it has I some of these other sectors, and so I think while they were asleep at the switch, I don’t think it was really just the regulators that were asleep at the switch, I think that they were appointed to be asleep at the switch.  And that Congress, Congressional Oversight wanted them to be asleep.  And so that it was really across the board.  It was just not that the regulators missed it.  They were appointed to not do anything. 

Question:
Will Americans post-financial crisis be smarter investors?


Robert Engle:
I think they’re more cautious.  On the other hand, that was true in 2003 also, when they had run up the internet bubble in 2000 and 1999, and then all of a sudden it blew apart.  So, people were cautious for a while, but then they jumped on some other bubbles.  We had an energy bubble, and then we had the banking bubble, and those – and I guess the housing bubble.  So I’m not really sure whether Americans are going to be better investors.

Recorded May 25, 2010
Interviewed by Andrew Dermont

Buoyed by past deregulation successes, Congress didn’t want Wall Street regulators to interfere before the crash.

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A massive star has mysteriously vanished, confusing astronomers

A gigantic star makes off during an eight-year gap in observations.

Image source: ESO/L. Calçada
Surprising Science
  • The massive star in the Kinsman Dwarf Galaxy seems to have disappeared between 2011 and 2019.
  • It's likely that it erupted, but could it have collapsed into a black hole without a supernova?
  • Maybe it's still there, but much less luminous and/or covered by dust.

A "very massive star" in the Kinman Dwarf galaxy caught the attention of astronomers in the early years of the 2000s: It seemed to be reaching a late-ish chapter in its life story and offered a rare chance to observe the death of a large star in a region low in metallicity. However, by the time scientists had the chance to turn the European Southern Observatory's (ESO) Very Large Telescope (VLT) in Paranal, Chile back around to it in 2019 — it's not a slow-turner, just an in-demand device — it was utterly gone without a trace. But how?

The two leading theories about what happened are that either it's still there, still erupting its way through its death throes, with less luminosity and perhaps obscured by dust, or it just up and collapsed into a black hole without going through a supernova stage. "If true, this would be the first direct detection of such a monster star ending its life in this manner," says Andrew Allan of Trinity College Dublin, Ireland, leader of the observation team whose study is published in Monthly Notices of the Royal Astronomical Society.

So, em...

Between astronomers' last look in 2011 and 2019 is a large enough interval of time for something to happen. Not that 2001 (when it was first observed) or 2019 have much meaning, since we're always watching the past out there and the Kinman Dwarf Galaxy is 75 million light years away. We often think of cosmic events as slow-moving phenomena because so often their follow-on effects are massive and unfold to us over time. But things happen just as fast big as small. The number of things that happened in the first 10 millionth of a trillionth of a trillionth of a trillionth of a second after the Big Bang, for example, is insane.

In any event, the Kinsman Dwarf Galaxy, or PHL 293B, is far way, too far for astronomers to directly observe its stars. Their presence can be inferred from spectroscopic signatures — specifically, PHL 293B between 2001 and 2011 consistently featured strong signatures of hydrogen that indicated the presence of a massive "luminous blue variable" (LBV) star about 2.5 times more brilliant than our Sun. Astronomers suspect that some very large stars may spend their final years as LBVs.

Though LBVs are known to experience radical shifts in spectra and brightness, they reliably leave specific traces that help confirm their ongoing presence. In 2019 the hydrogen signatures, and such traces, were gone. Allan says, "It would be highly unusual for such a massive star to disappear without producing a bright supernova explosion."

The Kinsman Dwarf Galaxy, or PHL 293B, is one of the most metal-poor galaxies known. Explosive, massive, Wolf-Rayet stars are seldom seen in such environments — NASA refers to such stars as those that "live fast, die hard." Red supergiants are also rare to low Z environments. The now-missing star was looked to as a rare opportunity to observe a massive star's late stages in such an environment.

Celestial sleuthing

In August 2019, the team pointed the four eight-meter telescopes of ESO's ESPRESSO array simultaneously toward the LBV's former location: nothing. They also gave the VLT's X-shooter instrument a shot a few months later: also nothing.

Still pursuing the missing star, the scientists acquired access to older data for comparison to what they already felt they knew. "The ESO Science Archive Facility enabled us to find and use data of the same object obtained in 2002 and 2009," says Andrea Mehner, an ESO staff member who worked on the study. "The comparison of the 2002 high-resolution UVES spectra with our observations obtained in 2019 with ESO's newest high-resolution spectrograph ESPRESSO was especially revealing, from both an astronomical and an instrumentation point of view."

Examination of this data suggested that the LBV may have indeed been winding up to a grand final sometime after 2011.

Team member Jose Groh, also of Trinity College, says "We may have detected one of the most massive stars of the local Universe going gently into the night. Our discovery would not have been made without using the powerful ESO 8-meter telescopes, their unique instrumentation, and the prompt access to those capabilities following the recent agreement of Ireland to join ESO."

Combining the 2019 data with contemporaneous Hubble Space Telescope (HST) imagery leaves the authors of the reports with the sense that "the LBV was in an eruptive state at least between 2001 and 2011, which then ended, and may have been followed by a collapse into a massive BH without the production of an SN. This scenario is consistent with the available HST and ground-based photometry."

Or...

A star collapsing into a black hole without a supernova would be a rare event, and that argues against the idea. The paper also notes that we may simply have missed the star's supernova during the eight-year observation gap.

LBVs are known to be highly unstable, so the star dropping to a state of less luminosity or producing a dust cover would be much more in the realm of expected behavior.

Says the paper: "A combination of a slightly reduced luminosity and a thick dusty shell could result in the star being obscured. While the lack of variability between the 2009 and 2019 near-infrared continuum from our X-shooter spectra eliminates the possibility of formation of hot dust (⪆1500 K), mid-infrared observations are necessary to rule out a slowly expanding cooler dust shell."

The authors of the report are pretty confident the star experienced a dramatic eruption after 2011. Beyond that, though:

"Based on our observations and models, we suggest that PHL 293B hosted an LBV with an eruption that ended sometime after 2011. This could have been followed by
(1) a surviving star or
(2) a collapse of the LBV to a BH [black hole] without the production of a bright SN, but possibly with a weak transient."

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