{"id":91282,"date":"2025-10-21T02:52:06","date_gmt":"2025-10-21T02:52:06","guid":{"rendered":"https:\/\/www.newsbeep.com\/nz\/91282\/"},"modified":"2025-10-21T02:52:06","modified_gmt":"2025-10-21T02:52:06","slug":"will-the-ai-bubble-trigger-a-financial-crisis","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/nz\/91282\/","title":{"rendered":"Will the AI bubble trigger a financial crisis?"},"content":{"rendered":"

OpenAI Co-Founder Sam Altman, Meta CEO Mark Zuckerberg, and Federal Reserve Chair Jerome Powell have\u00a0joined<\/a>\u00a0the\u00a0chorus<\/a>\u00a0of people\u00a0talking<\/a>\u00a0about an AI bubble and expressing concern that the US economy will\u00a0nosedive<\/a>\u00a0when it bursts. But what would a post-bubble nosedive look like?<\/p>\n

Given the weakness in almost every other sector of the US economy, it could well mean a recession. Economic slumps come in many flavours, though, and the worst tend to follow from financial crises. Yet most experts (with a\u00a0few exceptions<\/a>) have not warned of the AI bubble causing a financial crisis. Instead, the conventional wisdom seems to be that if there is a recession, it will look more like the one that followed the dot-com bubble in 2000 than the one following the 2008 global financial crisis.<\/p>\n

History does provide some support for this view. One well known\u00a0paper<\/a>\u00a0on bubbles and financial crises concludes that \u201cthe post-WW2 era appears to have weathered numerous equity price bubbles that did not turn into financial crisis episodes.\u201d But the authors also note that equity-price bubbles can\u00a0precipitate financial crises if they are fuelled by borrowed money. After all, the Great Depression was preceded by a debt-fuelled \u201croaring 20s\u201d equity bubble.<\/p>\n

This matters because, as economist Noah Smith\u00a0points out<\/a>, banks are funding \u201cprivate credit\u201d funds that in turn are lending money to fund the data-centre construction for an anticipated AI boom. Smith wonders whether we will see defaults on those construction loans when the AI bubble bursts, and whether private credit losses could cause a crisis for the banks that ultimately extended that credit.<\/p>\n

It is also worth pondering whether a bursting AI bubble could compromise the ability of other non-bank financial institutions to repay their loans. A recent JPMorgan analyst note on hedge-fund trading\u00a0observes<\/a>\u00a0that concentration in the \u201cMagnificent Seven\u201d tech stocks (companies like Amazon, Microsoft, and Nvidia) remains near historic highs. Yet the prices of these stocks are highly dependent on the companies\u2019 AI ambitions. If they fall short of their goals, and prices come crashing down, highly leveraged hedge funds may be forced into fire sales, unloading stocks to meet margin calls or repay bank loans. And if those fire sales don\u2019t fetch enough cash, the funds will default on their repayment obligations, potentially undermining the financial condition of the broker-dealers, primary dealers, and banks that extended them credit.<\/p>\n

Moreover, the same dynamics will also drive down the prices of tech stocks further, potentially forcing other leveraged financial institutions to sell off their portfolios, and so on. Nor should we assume that financial institutions desperate for cash will restrict themselves to selling off tech stocks. On the contrary, they may need \u2013 or prefer \u2013 to dump other types of assets, transmitting problems to other asset markets.<\/p>\n

Such a scenario is not far-fetched. The Fed reports that hedge-fund leverage hit\u00a0historically high levels<\/a>\u00a0in 2024, and in a September 2025\u00a0commentary<\/a>, analyst Adam Josephson notes that \u201chedge fund borrowing\/leverage [is] at a record high of $6.2 trillion, up more than 25% vs. a year ago at the end of March.\u201d Specifically, outstanding margin loans from broker-dealers and repurchase agreements from primary dealers are at historically high levels. And bank lending (particularly lending by\u00a0large banks<\/a>) to non-bank financial institutions \u2013 including broker-dealers, primary dealers, and the hedge funds themselves \u2013 is also\u00a0significantly elevated<\/a>, with bank loans to NBFIs now\u00a0accounting<\/a>\u00a0for \u201c$1.7 trillion in bank loans, or 13% of loans outstanding.\u201d<\/p>\n

Meanwhile, US financial regulators continue to permit this\u00a0expansion of leverage<\/a>, as well as green lighting the integration of traditional financial markets with crypto markets (which are also\u00a0rife with leverage<\/a>). Despite narratives about Bitcoin and other crypto assets serving as a hedge against risks in other markets, their price movements are highly\u00a0correlated<\/a>\u00a0with equities.<\/p>\n

Thus, we should expect to see crypto prices fall when the AI bubble bursts, and not just because of fire-sale dynamics. Both crypto and the AI bubble have been inflated by the same kinds of narratives about new technologies shattering old paradigms. If\u00a0evidence of AI\u2019s limitations<\/a>\u00a0starts to permeate the public consciousness during a market crash, more pessimistic sentiment on tech assets could well undermine crypto hype as well.<\/p>\n

This could then prompt a crash in Ponzi-like crypto assets such as Bitcoin, as well as runs on asset-backed stablecoins. If stablecoin issuers are forced to withdraw their cash reserves from banks, they could trigger a run on those institutions; and if they are forced to dump Treasuries from their reserves, another critically important financial market could be sucked into the maelstrom.<\/p>\n

Experts might not expect a stock-market crash to cause a financial crisis, but what if they are wrong? With leverage built up in so many parts of the system and asset-price movements so correlated, what if the financial system is a tinder box that could explode when the first spark lands on it?<\/p>\n

Of course, the financial system may well weather the bursting of the AI bubble, especially if the end arrives with a low hiss rather than a sudden bang. But we shouldn\u2019t count on it.<\/p>\n

*Hilary J. Allen, Professor of Law at the American University Washington College of Law, is the author of\u00a0Driverless Finance: Fintech\u2019s Impact on Financial Stability<\/a>\u00a0(Oxford University Press, 2022). Copyright:\u00a0Project Syndicate<\/a>, 2025, published here with permission.<\/p>\n","protected":false},"excerpt":{"rendered":"OpenAI Co-Founder Sam Altman, Meta CEO Mark Zuckerberg, and Federal Reserve Chair Jerome Powell have\u00a0joined\u00a0the\u00a0chorus\u00a0of people\u00a0talking\u00a0about an AI…\n","protected":false},"author":2,"featured_media":91283,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[20],"tags":[365,363,364,111,139,69,145],"class_list":["post-91282","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\/91282","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=91282"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/91282\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media\/91283"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media?parent=91282"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/categories?post=91282"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/tags?post=91282"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}