{"id":550452,"date":"2026-07-30T01:17:09","date_gmt":"2026-07-30T01:17:09","guid":{"rendered":"https:\/\/www.newsbeep.com\/nz\/550452\/"},"modified":"2026-07-30T01:17:09","modified_gmt":"2026-07-30T01:17:09","slug":"the-ai-threat-to-financial-stability","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/nz\/550452\/","title":{"rendered":"The AI threat to financial stability"},"content":{"rendered":"

US Federal Reserve Chair Kevin Warsh recently announced a\u00a0new task force<\/a>\u00a0that will \u201csurvey the pace, the reach, [and] the economic impact of new general-purpose technologies, including AI, and explore the implications for the Fed\u201d as it pursues its \u201cemployment and inflation mandates.\u201d Notably absent from Warsh\u2019s statement was any mention of the impact of AI on financial stability, the Fed\u2019s de facto third mandate.<\/p>\n

The Fed has shown some awareness of the risks AI poses for financial stability. In April, Warsh\u2019s predecessor Jerome Powell, together with US Treasury Secretary Scott Bessent,\u00a0convened<\/a>\u00a0a meeting to assess how advanced AI models could affect cybersecurity in the banking system. But even this approach was far too narrow.<\/p>\n

In the United States, both the financial system and asset markets have become a\u00a0one-way bet<\/a>\u00a0on AI. If current trends persist, outstanding AI data-center debt will surpass mortgage debt by the end of this decade. The Fed should now be asking whether the revenues from these data centers will generate enough cash to repay creditors on time.<\/p>\n

That question is often conflated with two others: whether AI is a bubble and whether it is a transformative technology. One might be tempted to position this as a dichotomy\u2014AI is\u00a0either\u00a0a bubble\u00a0or\u00a0a transformative technology\u2014but this would be a mistake. The US railroad boom of the 19th century ended in the Panic of 1873, and the telecom and dot-com boom of the 1990s culminated in a stock-market crash. In both cases, the technology was genuinely transformative, but creditors and shareholders were wiped out anyway, because investment outpaced any plausible near-term return.<\/p>\n

Likewise, when it comes to AI, technological success will not guarantee financial success. The revenues AI will generate remain uncertain, but borrowers\u2019 repayment schedules are fixed. AI tools can be widely adopted, and a data center can be heavily used, without producing enough cash to service their owners\u2019 debts. The financial-stability concern arises from the mismatch between speculative future revenues and present contractual obligations.<\/p>\n

The arithmetic is daunting. David Cahn of the venture capital firm Sequoia\u00a0estimates<\/a>\u00a0that this year\u2019s roughly $750 billion in hyperscaler AI capital expenditure will need to generate about $1.5 trillion in end-customer revenue over the life of the equipment to pay for itself. By his calculation, the entire AI buildout since the 2022 launch of ChatGPT now carries a cumulative payback minimum of some $3 trillion. Anthropic is rumored to have annualized revenues of around $60 billion.<\/p>\n

The consulting firm Bain & Company\u00a0calculates<\/a>\u00a0that funding the compute needed to meet anticipated AI demand by 2030 will require some $2 trillion in new\u00a0annual\u00a0AI revenue. Given that a bubble is what happens when an asset\u2019s price far exceeds the cash flows it generates, such projections seem to support warnings that AI is indeed a bubble.<\/p>\n

Already, funding for the AI buildout has\u00a0shifted decisively<\/a>\u00a0from the tech giants\u2019 cash flows to capital markets. Circular financing arrangements abound: chipmakers invest in AI labs, which use the money to buy chips, and cloud providers fund the startups that rent their servers. The result is a positive feedback loop between rising valuations and capital expenditures.<\/p>\n

Chip giant Nvidia has emerged as a\u00a0backstop<\/a>\u00a0for the \u201cneoclouds,\u201d allowing thinly capitalized cloud providers to raise private financing on attractive terms. Tech giants accumulate\u00a0massive<\/a>\u00a0off-balance-sheet liabilities through joint ventures and leasing structures. And a growing share of the capital comes from\u00a0private credit funds<\/a>, which often lend to projects affiliated with their own sponsors.<\/p>\n

Unlike the railroads or fiber-optic cables produced by earlier manias, this investment does not leave behind durable assets. Chips comprise roughly half the cost of an AI data center, and they are effectively unusable after 3\u20135 years. The collateral might lose value faster than the debt is repaid.<\/p>\n

Moreover, the broad-based productivity gains and labor-market effects that AI is widely expected to deliver are not yet visible in the data. A recent Fed\u00a0staff note<\/a>\u00a0concludes that this is because AI remains in its \u201cbuildout\u201d phase. But a productivity surge will also require businesses to make immense internal investments to reengineer their processes. Nevertheless, markets are already pricing in robust\u00a0earnings growth<\/a>, driven in part by AI-driven productivity gains, raising concerns about an \u201cearnings bubble.\u201d<\/p>\n

Most discussions of the downside risk of the ongoing AI boom have focused on the stock market. But the bigger risk is to credit markets. We now have a \u201cmarket-based\u201d financial system, in which credit is intermediated less by banks than by bond markets, securitization vehicles, and nonbank lenders. The danger is not a 1930s-style run on bank deposits, but a 2007-style run on the shadow banking system: doubts about credit quality trigger a contraction in short-term funding, and borrowers must sell into a falling market, leading to further price declines.<\/p>\n

With short-term funding markets seizing up, the Fed would come under enormous pressure to backstop nonbank lenders and data-center debt, just as it backstopped money-market funds in 2020, at the start of the COVID-19 pandemic. But AI is even\u00a0less popular<\/a>\u00a0today than Wall Street was in 2007. A bailout of both would likely destroy what remains of Fed independence.<\/p>\n

There is a chance that massive AI capital spending will be vindicated, generating the revenues required to service trillions of dollars in debt. In that case, however, the implied labor-market dislocation would be without historical precedent. It is the coin-flip of nightmares: heads is financial instability, and tails is a biblical employment shock.<\/p>\n

In any case, financial stability must be central to the Fed\u2019s AI agenda. Even if this time proves to be different technologically, it might not be different financially.<\/p>\n

Brian Judge is Research Director of the Program on Finance and Democracy at the University of California, Berkeley. Copyright: Project Syndicate<\/a>, 2026, and published here with permission.<\/p>\n","protected":false},"excerpt":{"rendered":"US Federal Reserve Chair Kevin Warsh recently announced a\u00a0new task force\u00a0that will \u201csurvey the pace, the reach, [and]…\n","protected":false},"author":2,"featured_media":550453,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[20],"tags":[365,363,364,111,139,69,145],"class_list":["post-550452","post","type-post","status-publish","format-standard","has-post-thumbnail","category-artificial-intelligence","tag-ai","tag-artificial-intelligence","tag-artificialintelligence","tag-new-zealand","tag-newzealand","tag-nz","tag-technology"],"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/550452","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/comments?post=550452"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/550452\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media\/550453"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media?parent=550452"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/categories?post=550452"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/tags?post=550452"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}