This article is all vapor. After reading it in it's entirety, there is only a short section that's actually about the headline, and it communicates nothing about what the headline means. What is 17x what?
I just don't see how the broader market is exposed to an AI crash in the way it was exposed to subprime loans. If OpenAI goes belly up is it really taking anyone else down with it?
Source: https://www.economist.com/finance-and-economics/2025/08/18/h...
So I think if there was an AI crash, US economy goes with it in the short term
But I agree with you, the article is too light on details for how inflammatory it is.
NVDA, MSFT, AAPL, META, and GOOG are all heavily investing in AI right now, and together make up 28% of the money tied up in S&P 500 indices. Simply investing in the S&P 500, which many people do, exposes you to meaningful downside risk of an AI bubble pop.
Don't get me wrong; I'm no fan of the billionaires. Eat the rich, etc. But I don't want the billionaires to lose everything suddenly, because I'm 100% sure my 401k will go down with them, and 50% sure my job will.
In the case of the collapse of an AI bubble, I don't see as much of a direct relationship to effects on the average Joe. Yes all those billions spent by tech investors will get written off, the companies heavily invested in AI will shed well paid tech jobs in a sector that was craving talent anyway.
I think the biggest effect would be the fact that all that capital was spent on AI tech rather than productive assets and businesses. That's a big opportunity cost, and would hit growth, but I don't see it wiping out ordinary people in the same way. The pain will be heavily concentrated on investors and for everyone else it will just be a slow drag but not a catastrophe.
The real problem is if there are other negative economic effects that compound with it.
When you say "lost their homes", do you mean "I owned the house and somehow I now own no house and have no money for it, it just evaporated", or do you mean "I took a loan I could not afford, on a house I could not afford, while investing a tiny amount of money or none at all into the deal, and hoping to profit from ever increasing prices, and using my equity as an infinite-money ATM, and when that stopped, the bank took the house back"? If the latter, then what was lost is not "homes" but unrealistic prospects of profits from the thin air. If the former, I'd like to know how exactly a subprime crisis could cause something like that.
There were plenty of people that bought houses at reasonable prices and down-payments and still lost their ass when downstream ramifications took out unrelated businessss.
Actual people are not relying on actual AI. And I doubt many actual people would be hurt by the AI crash.
In some cases they lost their job meaning they needed to move to find work, but that would mean selling a house worth less than they bought it for which mans they'd owe the difference, and the mortgage on the new house would be unaffordable anyway due to the increase in mortgage rates.
Then bear in mind the hyper aggressive marketing tactics, and assurances from financial institutions and politicians that this was all fine and there was no risk.
Ultimately though, this has nothing at all to do with my comment. I meant "they lost their homes" and that's all. I didn't assign any blame to anyone, nor did I try to accuse anyone of anything, all I talked about was the potential economic repercussions.
And, frankly, it's literally the bank's job not to make loans that people will default on too frequently (for their own sake), so if you're not exceptionally knowledgeable about banking, it's not unreasonable to trust your bank and their advisors not to make a loan you won't be able to pay back. Like, sure, you shouldn't trust them not to screw you on the terms and with interest, but banks mostly are trying to make loans they expect to get paid back, and I would personally expect them to have a good idea of how much they can trust me with.
It's not the bank's job though to decide whether it's ok for you to treat the house as a long-term asset which consumes a part of your cash flow, or as a speculative gamble. You can find a bank that will support either, but it's on you to decide which road to take. And if somebody takes the speculative road and loses, then it's not exactly the banks' fault. The adult should take responsibility for their own actions.
> it's not unreasonable to trust your bank and their advisors not to make a loan you won't be able to pay back.
No, it's not reasonable at all. Loan officers do not have a fiduciary duty towards you. They have a fiduciary duty towards the bank, so that's what they worry about - to take care of bank's interests. Assuming those interests would always align with yours is a dangerous naiveté. There are financial advisors who are fiduciaries - and you can hire one if you need - but you won't find them in your mortage bank's loan office. Yes, the bank is interested, in most cases, not to produce overtly bad loans - but that doesn't mean they care how you are going to pay it, and there's a lot of chance they'd sell your loan to another servicer in a year or two anyway. They have no duty to figure out if taking this loan won't harm you, that's your duty.
But your respin is kind of a whopper too. While there were absolutely people cynically leveraging real estate to make a buck, the overwhelming majority of foreclosures in the wake of the '08 crisis were just regular homeowners. They needed a home (maybe they moved, or got married, grew up, downsized, etc... people need homes!). So they called a real estate agent and a bank to figure out what they could get, and everyone told them (correctly) that they could get a great home at a very reasonable price with very little down payment. Because everyone else was doing it. So they did.
Everyone who took an adjustable loan, interest only loan, etc., who didn’t have an exit strategy already in place in case of inability to refinance, had themselves to blame, regardless of whether “everyone was doing it.“ I don’t mean any criticism toward people who happened to lose their jobs and would’ve otherwise been able to continue paying on the loans they’d taken. Nor am I saying it’s OK to take advantage of people who don’t bother to read or understand the assumptions inherent in the contracts that they’re signing. But people were incredibly naïve if they accepted some broker’s verbal assertion that they’ll always be able to refinance the otherwise-unaffordable house on favorable terms in 3 or 5 years or whatever.
Come on. Median homeowners (even median HN commenters) are hard put to even define those terms, much less execute your strategy correctly. This kind of blame-the-dummies caveat emptor absolutism fails in the modern world. It's like demanding people decide on their own medical diagnoses and select treatments from a menu.
We license realtors and banks, regulate mortgage marketing and have a CFPB for a reason.
Also, I think you're underestimating the intelligence of the median person. If a doctor tells me that for $500, they can surgically implant a chip in me that will give me LeBron James-level basketball skills in 3 years, and I say "Cool, cut me open, Doc!" I am partly to blame because I should have known that isn't possible. Yes, the doctor should still be punished. But people should get multiple opinions for facts so obviously too good to be true and only commit to something when they understand the risks.
That doesn't seem like a good faith analog for "I got a 3.2% mortgage with 5% down and payments less than my last rental".
You keep pretending that the idea that the real estate market was internally overleveraged by repackaged derivatives held by investment banks was some kind of obvious thing that regular homeowners were too stupid to see. And I'm telling you it wasn't, because no one saw it, not even the bankers and regulators, until it was too late. Blaming the homeowners for not "understanding the risks" is unfair, but also frankly non-actionable. They'll never be as smart as you want them to be in hindsight, because no one is.
for 3 or 5 years though. That's part of the terms. Nothing outside of that was promised to them on paper.
It's reasonable to expect someone looking at a 5/1 ARM or an 'Interest only for X years' loan to ask "What can I be guaranteed in writing will happen at the end of that period?" The right answer was "Nothing. Interest rates have historically moved between 3% and 22%. Your new payment could be 4x your old rent, or it could get even cheaper. The value of the home could go up or it could go down. By taking this loan you are betting your house, the down payment, and your credit rating on not just one but multiple assumptions: Low rates and continuing appreciation."
That's setting aside the systemic risks that I agree nobody not in the financial world ought to have been expected to understand.
> And I'm telling you it wasn't, because no one saw it, not even the bankers and regulators, until it was too late
That's not true. A lot of people called it unsustainable at the time. A lot of people said there's a bubble. They were laughed at and shouted down, as doomsayers that are just to much of a buzzkill to let people just enjoy a new cheap house. A lot of people didn't buy into the bubble, because they correctly deduced it's not worth it. You don't hear about them for the same reason why the newspapers don't report there wasn't a murder - there's nothing to report. So you hear the stories of those who chose wrong and got hurt - because there's something to report there. But if a responsible family sees a loan too good to be true on a house they can't afford and walks away - you'd never know about it. But they exist. And there should be more of them.
That's a fallacy. With billions of humans, given any doom, someone was there to sling it. Because there is always someone slinging doom. You can't listen to all the doomslinging, because to first approximation it's all wrong.
The truth is we'll never know whether the doomslinging cranks were just cranks or geniuses. But the fact that they haven't gone on to further heights of analytical magic tells me they were probably just lucky cranks.
It's the same reason that every four years we learn about a douglas squirrel or whatever that has predicted the last 14 presidential elections. Because we don't hear about all the critters that didn't.
Yes and no. Yes they were regular homeowners, but they also massively overbid on homes they couldn't afford because it doesn't matter, we'll refinance under new valuation in a couple of years and will only profit from it! And by overbidding, they made the situation worse for more careful buyers, and helped to feed the frenzy. They are not the sole guilty party, there is a lot of guilt to go around, but part of the guilt lies on people who entered into bad deals because they were sure home prices never go down ever, and it doesn't matter how bad the deal is. I've been on a number of realtor presentations at the time that explicitly said things like that. And people bought into it massively. And yes, "everybody else" (well, not literally everybody, but a lot of people) did it.
That's exactly my point. It's still wrong what they did, and if they exercised more restraint and foresight, and less greed, maybe the size of the problem would be less, and less people would be hurt. I lived through it, and I had those doubts also - should I do what "everybody else" is doing? Should I participate in a clearly unsustainable bubble? Am I an idiot to not jump in at the chance of literally free money? Overwhelming majority faced the same questions, and a non-negligible part of them chose the irresponsible answer. And they got hurt. I feel for them. But I also do not forget it was their choice to make.
In that case, a prolonged recession may occur (that would've occurred anyway), and the effect will be felt throughout the economy.
But, again, that's just a general recession being triggered by the AI bubble bursting, i.e. AI no longer propping up the economy, so that's not a bad thing. What the results of that are in terms of severity or impact I wouldn't know, I don't think anyone knows.
Artificially low interest rates have stimulated investment into AI that has hit scaling limits, says research firm
He blames "low interest rates," yet interest rates have surged since 2022 to their highest levels in decades. He cannot even get the basic facts right, which kills his credibility at the start.
This also torpedos a common narrative that high interest rates are always bad for asset prices. The difference between 1% vs 5% interest rates does not factor much into VC decisions when the expectations are for 40-100+% annual returns with the hottest AI companies, which far exceeds the additional cost of borrowing. A similar pattern was seen in the the '80s and the late '90s, in which high interest rates also coincided with high valuations of tech companies.
This means a much longer effort at reflation, a bit like what we saw in the early 1990s, after the S&L crisis, and likely special measures as well, as the Trump administration seeks to devalue the US$ in an effort to onshore jobs," he says.
In an attempt to paint a negative picture of impending crisis, he gives examples, of 2001 and 1991, of among the mildest recessions ever. The US stock market and economy would go on to boom in 1995, just a few years after the S&L crisis.
If there is a job that AI needs to automate, it's these overpaid and useless analysts.
You can see him talking about the research here https://youtu.be/uz2EqmqNNlE?t=40
The 17x refers to a macro model based on the "cumulative Wicksell spread" that suggests the stock market may be overvalued due to interest rates, nothing about AI specifically.
The youtube talk, and the slides which are from his report are quite interesting, and I think the economic analysis is quite good, though he's not a tech/AI guy.
As far as I can figure for the Wicksell spread you calculate (annual GDP growth) +2% - (annual interest rates) and then integrate that which gives a graph with bumps on and the current bump is 17x the size of the one at the time of the dot com bubble.