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Are We in an A.I. Bubble? I Suspect So

But if we are, what should we do about it?

I’d also add that any government that set out deliberately to slow growth in the most vibrant sector of the economy would get its head handed to it by the voters—and if the Federal Reserve did it, that would supercharge existing efforts by this administration to threaten its independence. When an asset bubble bursts, that correlation can quickly get very high, and if that possibility isn’t properly built into the modeling (as it wasn’t with respect to sub-prime mortgages), then entities like banks and insurers who think they are holding negligible tail risk can suddenly face losses that are many multiples of what they could actually survive. This is precisely the kind of situation where an industry will be unable to self-regulate even if it sees the potential for catastrophe, because competitive pressures will force all players to take advantage of lax regulation lest they lose market share, but the amount of profit at stake for the banks and insurers themselves can’t be anywhere near where it was in the subprime mortgage days, so we’re probably not at the point yet where that business is too big to be constrained.

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