The looming AI bubble is a story of debt, and that should worry us. Unfortunately, manias fueled mainly by credit almost inevitably end badly. The railway boom of the 19th century and more recently the housing crash of 2007-2008 were heavily fueled by debt, financial leverage and speculative credit, and both were followed by a severe financial crisis.
J.P. Morgan Chase analysts anticipate $5 trillion of spending on AI infrastructure between now and 2030. This year alone, four tech companies – Amazon, Alphabet, Meta and Microsoft – have plans to invest $670 billion on AI infrastructure. When measured as a percentage of U.S. GDP, this is more than the Apollo space program, the U.S. interstate highway system, railroads, and every other major capital expenditure in U.S. history except the Louisiana Purchase, according to the Wall Street Journal.
When it comes none of us will be isolated from the bubble bursting. If you use banks or depend on the financial system in any way, you too are bearing some of the risk. Your ISA, life insurance plan, pension plan, and bank provide much of the money that turns into loans or investments in each of those financial mechanisms. Worse still, we’re seeing a rise in specific forms of financial engineering circular financing, “off books” special purpose vehicles, huge private credit loans, and significant volumes of credit default swaps and asset-backed securities which obscure a full understanding of the systemic risks. And, again, those mechanisms are funded, in large part, by retirees, small businesses, and others with savings, and all of us who depend on the financial system.
One possibility is a version of the 2008 crash, in which the bursting bubble takes down the global economy. This is not an unreasonable worry, since the “Magnificent Seven” tech companies – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla – were responsible for a significant portion of America’s economic growth last year. Those companies are entangled through investments in each other and rival AI companies, and are enmeshed in financial engineering. When it came to saving the economy it was not homeowners who were looked after. When the Obama administration did develop foreclosure programs, Secretary of the Treasury Tim Geithner said they were meant to “foam the runway” – meaning the focus was to help the banks avoid a crash.
Compare that to the banking reforms of the New Deal, a reaction to the Great Crash in 1929. That system hit at the core structural problems in the financial markets creating deposit insurance, prohibiting financial conglomerates, and creating simple structural limits on bank activities. That system worked without another major crisis until it was watered down in the 1980s and then abandoned in the following decades.
During the Great Recession that followed the financial crisis there was little accountability for the people who caused the crisis directly or for those whose wrong policy choices enabled and exacerbated it. While one obscure, mid-level banker was imprisoned, none of the heads of the major banks were prosecuted for crimes or went to jail. In comparison, in the 1930s, the head of the New York Stock Exchange, Richard Whitney, went to prison. More than a thousand bankers went to jail after the savings and loan scandal in the 1980s. After the Enron-era accounting scandals the top corporate bosses were prosecuted.
It is time to stop asking if there will be an AI bubble burst, and start asking what we need to do now to be best prepared to respond when it does burst.
Policymakers should start developing and debating proposals now to address the underlying structural problems in the AI sector that are likely to be drivers of a future crash. They need to understand and start developing reforms to address circular financing, opaque debt financing, massive (and often non-transparent) subsidies by state and local governments, and the interconnections that have led to sprawling conglomerates. They need to start proposing new, imaginative ways to develop the AI-sector in a way that works for ordinary people and small businesses, like public cloud computing services and worker protections, rather than leaving the fate of society to the AI oligarchs. They should commit in advance to robustly prosecuting fraud under criminal laws to send the signal now that illegal behavior will not be tolerated. They need to commit to helping ordinary people, not bailing out the AI companies.
One of the consequences of the way the financial crisis was handled is that it led to the populist politics of the likes of Farage. Another downturn in the economy could be the fatal blow that hands him the keys to 10 Downing Street. Unless policymakers get prepared now, they will miss it and people, once again, will be furious that our leaders failed us.