Circular Financing Arrangements, Mounting Risky Debt, and Increased Stock Market Exposure: The AI Bubble is Primed to Pop
Open Markets Institute and Americans for Financial Reform Education Fund released a new report, “Brace for Impact: Protecting People and the Economy when the AI Bubble Bursts,” that breaks down how a handful of tech companies and their financial backers are fueling the AI bubble, outlines vulnerabilities in the financial system and wider economy that could intensify an AI crash into the next financial crisis, and provides steps that policymakers can take to mitigate the damage and protect everyday people from bearing the costs of a bubble-induced crash.
Listen to the audio version of the report here.
Recent reporting highlights that AI warning signs are already emerging. OpenAI's annualized revenue was a full $20 billion below a figure widely reported just weeks earlier. NVIDIA-and Blackstone-backed Firmus Technologies abandoned a planned IPO in Australia after investors balked at its valuation and business prospects. Fitch Ratings, a U.S. credit-rating agency, warned that any sharp correction of AI stocks could plunge the U.S. into a recession, and the IMF named an AI-driven market correction as financial salient stability risk.
“Silicon Valley and Wall Street are making enormous bets on AI, and they're finding increasingly risky ways to keep the money flowing,” said Matthew Scherer, Open Markets Institute fellow. “But when this bubble bursts, it won't just be billionaire investors who suffer. Workers could lose their jobs, families could see their retirement savings evaporate, and communities could face the fallout from another financial crisis. Policymakers need to act now to shore up the financial system and make clear that taxpayers will not be forced to bail out the companies and financiers responsible.”
“Silicon Valley and Wall Street are profiting from inflating a bubble held aloft by circular financing, hidden debt, and opacity, and the Trump administration is worsening the danger by rolling back guardrails that protect investors and financial stability,” said Maya Jenkins, senior policy analyst at Americans for Financial Reform Education Fund. “If nothing changes, working people will pay a high price for an AI crash. Policymakers should be taking urgent action to reduce the risks. And they should be committing now to not bail out the AI companies or banks and financial firms that caused the problems.”
"AI companies are investing trillions without a path to commensurate revenues, and they’re papering over the gap with circular financing, opaque debt, and accounting gimmicks,” said Asad Ramzanali, director of AI and technology policy at the Vanderbilt Policy Accelerator. "Matthew Scherer and Maya Jenkins’s new report shows how that could spiral into an economy-wide crisis. As they recommend, policymakers should act now to protect American families from bearing the costs of an AI crash they didn’t cause.”
“Matthew Scherer, a fellow at Open Markets Institute, and Maya Jenkins, a senior policy analyst at Americans for Financial Reform Education Fund, have produced an essential and urgently needed analysis of the financial risks building beneath the AI boom,” said Tonantzin Carmona, director of economic policy at The Century Foundation. “Their report lays bare how mounting debt, opaque financing arrangements, and deeply interconnected financial institutions could turn a speculative technology boom into a much broader economic crisis, threatening workers’ retirement savings and economic security. Crucially, they don't just sound the alarm. They offer a roadmap for policymakers to act before a crisis hits, strengthen financial safeguards, and ensure that if these bets fail, working families aren't once again left paying the price. This should be required reading for anyone responsible for safeguarding our economy.”
"The risk that the AI bubble could burst and trigger a 2008-scale financial crisis has been growing for at least a year while federal regulators fail to enforce the laws designed to protect the economy against a 2008 redo,” said Damon Silvers, policy director and special counsel at AFL-CIO. “Matt and Maya’s report provides an in-depth look at the nature of the AI bubble, why it poses such a serious threat and, most importantly, what policymakers need to do to head off a potential crisis."
The report details how tech companies such as Alphabet, Amazon, Anthropic, Meta, Microsoft, OpenAI, Oracle, and SpaceX have driven us to this critical juncture by spending trillions on AI-related infrastructure and operating costs without the financial returns needed to cover those expenditures.
Through dubious accounting tricks, opaque private fund investments, and circular financing, these companies are relying on increasingly risky tactics to sustain their explosive spending. The concentration of U.S. wealth and workers' retirement savings in AI-related stocks, the many risk transmission channels between the AI industry and traditional banks, and the ripping out of guardrails designed to make the financial system more resilient suggest that an AI crash could affect more than just Silicon Valley and Wall Street. Workers’ and communities' economic security is on the line.
In addition, the report lays out steps that policymakers at every level of government can take to limit potential harms before and after a crash, including
demanding financial transparency across the entire Al ecosystem,
closing statutory and regulatory loopholes that enable deceptive accounting practices,
strengthening regulation and supervision of AI financiers, and
refusing to bail out AI firms or financial backers.