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Who’s to Blame for the Mess?

Question: After 2006, what was the thinking among regulators and financial professionals concerning a scenario in which housing prices fell significantly in many areas of the country? (Arnold Kling, Econlog)

Mark Zandi: I think though, if you go back to '06, there's a broad based belief that house prices would not decline, at least across the nation.  There would be regions of the country, California perhaps, and New York and maybe Florida where we see some price declines, but nothing that would encompass the entire national housing market and get outright price declines. 

I mean, I can remember -- we do a lot of house price forecasting for our clients and in '06, at some point, we forecasted that national house prices were going to decline in '07.  Not by a lot, but b a little bit.  A couple, 3 percentage point decline and that was a big change and created a lot of angst among a lot of our clients saying, "How can that possibly be the case?"  So, of course, it was a couple of 3 percent and it ended up being 30% plus.  So, I think there was this general view, based on historical experience that this just couldn't happen.  At least not to the scale that it obviously ultimately did occur. 

Now, I have to say, unfortunately, because the models were based on looking at house prices relative to people's incomes and house prices relative to effective to apartment rents, the models wanted to say bigger price declines in some big markets.  But I didn't even believe it.  I had a hard time digesting what the models were telling me.  And I felt like, if I came out and said prices were going to decline, that was a big enough statement and I didn't have to say they were going to decline by 23%.  Because then you lose credibility.  And that's also part of the problem in this period because for a number of years, good economists were arguing that house prices were getting inflated, it was speculative that in all likelihood we would at least see them go flat or decline.  But if you say that say, in '05 and then prices continued to rise by double digits, and then you say that again in '06, and then prices rise again in double digits.  Then you lose credibility and no one listens.  And so that became the problem. 

And that's not a typical of the bubble, but that's exactly what happened and why a lot of us lost credibility because we had been arguing that this wasn't sustainable, but we started arguing that too early. 

Question: How did we miss an $8 trillion asset bubble? (Dean Baker, Beat the Press)

Mark Zandi: Well, a number of things.  I think at the root of it was a very new and complex process of financing mortgage lending and other lending altogether.  The process of securitization, which at its core I think has value and is a good thing.  It provides for the more efficient allocation of savings into investment, but I think the problem is no one really understood the process from start to finish.  You had the originators making the loans who were focused on what they did.  You had the investment banks buying the loans and packaging them into securities, and the focused on what they did.  You had the rating agencies looking at the securities and deciding, how is this going to look, and they were focused on what they did.  The regulators were focused on individual aspects of this process.  But no one was looking holistically and saying, "Is this going to work?  Does it make sense?"  And at the end of the day, we made a lot of bad loans because the process didn't make sense. 

Question: Were financial regulators or industry executives equally to blame? (Arnold Kling, Econlog)

Mark Zandi: I think industry executives, they were looking at it only in the broad sense, and they were only focused on their aspect of the process, so they really didn't consider everything in its totality and regulators the same way. 

Now the other problem regulators had was there was a general view in regulatory circles that the market would figure it out.  In a sense the regulators were thinking the CEO's had it figured out and that they didn't need to do much oversight or really consider what the CEO's were doing.  The CEO's in fact, weren't -- because of the way the securitization process was structured, no one really was focused on the entire system, and regulators didn't understand that.  But they thought the market was working properly and the CEO's would get it right.  And of course, that was wrong.

Recorded on November 10, 2009

It was partly the forecasters’ attempts to protect their credibility that put us in this dilemma, says Moody’s chief economist Mark Zandi.

The “new normal” paradox: What COVID-19 has revealed about higher education

Higher education faces challenges that are unlike any other industry. What path will ASU, and universities like ASU, take in a post-COVID world?

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Sponsored by Charles Koch Foundation
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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
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  • 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."


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."