Brian Judge
Research Director, Berkeley Program on Finance and Democracy
In a recent op-ed for Project Syndicate, BESI’s Brian Judge argues that U.S. asset markets’ one-way bet on AI resembles past bubbles like the dot-com boom, when the pace of technological transformation failed to deliver near-term, real-world returns. AI data-center debt is on track to surpass mortgage debt by the end of this decade, but it’s questionable whether revenues from these data centers will generate enough cash to repay creditors. Meanwhile, circular financing arrangements abound, in which chipmakers invest in AI labs, who use the money to buy chips, and cloud providers fund the startups that rent their servers.
The results of this big bet could be catastrophic. While most discussions of the downside risk of the AI boom focus on the stock market, the bigger risk is to credit markets, says Judge. “We now have a ‘market-based’ financial system, in which credit is intermediated less by banks than by bond markets, securitization vehicles, and nonbank lenders,” Judge writes. “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.”
Read the full op-ed at Project Syndicate (free newsletter sign-up required).