More than 15 years later, we are still feeling the consequences of these policy failures. The “too big to fail” banks are even bigger now than they were before 2008. Legislation in 2018 loosened some very-large-though-not-huge banks from stricter oversight, and when Silicon Valley Bank failed in 2023, the federal government bailed it out. More broadly, anger over bank bailouts and minimal accountability in the post-2008 period has contributed to the rise of economic populism on the political left and right. The Great Recession and the bailout of bankers, but not homeowners, also had lasting effects: the country now exists in what some have called a K-shaped economy. The wealthiest are doing great and spending freely, and everyone else is suffering and tightening their belts.
At the core of the AI bubble is a basic math problem. There is a fundamental mismatch between the trillions being invested in the infrastructure to develop AI and the billions people and companies are spending to use AI. Specifically, 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. Yet OpenAI and Anthropic have annualized revenues of about $25 billion and $19 billion, respectively. Unless AI revenues grow by orders of magnitude soon, there’s a Grand Canyon-sized gap that will be hard to cross.
This is the kind of financial jargon that makes most people’s eyes glaze over. But here’s what you need to know: if you use banks, have a retirement account, or depend on the financial system in any way, you too are bearing some of the risk. Your 401(k), life insurance plan, pension plan, and bank provide much of the money that turns into loans or investments in each of those financial mechanisms.
Even if AI is a technology that is widely adopted and transformative for society, its mismatch of investment and revenues, coupled with all these financial interconnections, could crash the economy.
Comparing crashes
Another 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.
First, in 2008, one of the central features of the crisis response was a commitment to bailing out capital, but little emphasis on helping ordinary people. The Troubled Asset Relief Program (TARP), for example, worked to shore up the banks, not homeowners. Indeed, 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.
What is less discussed is that policymakers facilitated these crises. They pushed policies—like financial deregulation—that enabled the behaviors that led to the crises. Larry Summers, for example, was a critical figure in the 1990s in pushing for deregulation of the financial sector. But Summers was not ostracized from the policy community—or even sharply questioned—for getting wrong perhaps one of the most consequential decisions in U.S. economic history. Instead, he was chosen to lead the response to the crisis from the National Economic Council and then spent the following decade as one of the most influential figures in economic policy, before recently stepping back amidst evidence of his close relationship with Jeffrey Epstein.
Preparing for a crash
“Plan beats no plan,” former Treasury Secretary Timothy Geithner once said. A true but tragic remark, given how unprepared policymakers were in 2008. For this time to be different, policymakers need to have plans ready. And that means getting prepared now, before a possible catastrophe strikes.
No one knows how or when this anticipated crash will occur. So any specific proposal, including one we recently published, will not be perfect for what happens. But as Dwight D. Eisenhower, both as NATO Supreme Commander and as President, remarked, it is the act of planning, not the specific plans, that is indispensable. This is why the time for proposals, hearings, and debates is now.
Unless policymakers get prepared now, they will miss it. And people, once again, will be furious that our leaders failed us.
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