The Boston Globe - The AI bubble could burst — and take the economy with it
Open Markets senior fellow Matt Scherer co-writes to that the AI boom has become a debt-fueled speculative bubble that could trigger a broader financial crisis unless regulators strengthen safeguards, increase transparency, and commit to no AI bailouts.
The AI bubble is a speculative frenzy of historic magnitude, with the potential to cause economic harms worse than the 2008 financial crisis if it bursts.
There are steps policy makers should take to better safeguard the financial system from the threat of a systemic shock. Instead, regulators are taking steps that threaten to inflate the bubble still further and make the consequences of its collapse more severe. The stability of our economy depends on them quickly changing course.
The AI bubble stretches throughout the economy. The US stock market has practically become synonymous with the AI boom; all nine of the most valuable US companies are tech companies that are betting heavily on AI. Those corporations are at the center of a $7 trillion spending spree on data centers and related infrastructure to train and run generative AI models.
While the early years of the AI boom were largely financed by big tech profits, the exploding cost of the build-out, combined with comparatively meager revenues from AI products and services, has increasingly pushed AI companies to debt markets. Nikkei Asia estimates that just five tech giants have racked up an estimated $3 trillion in debt, including $1.65 trillion hidden off their balance sheets (financial arrangements similar to those that led to Enron’s spectacular collapse). That is greater than the size of the subprime mortgage market at its 2007 peak — and the subprime bubble triggered the 2008 financial crisis when it burst.
Read full article here.