BRUSSELS – Every time a new technology captures our collective imagination, the machinery of finance whirs to life. It happened with railroads in the 19th century, with internet stocks at the turn of the millennium, and with complex mortgage securities in the mid-2000s. The pattern is as predictable as it is perilous: immense optimism fuels immense investment, valuations detach from fundamental realities, and the system becomes vulnerable to a sharp, painful correction.
We are living through the latest chapter of that story. According to a sobering interview with POLITICO, John Schindler, the secretary-general of the Financial Stability Board, sees troubling parallels between today’s frenzy around artificial intelligence and the speculative manias that preceded the dotcom bust and the 2008 global financial crisis. From his office in Basel, the nerve center of global financial regulation, Schindler watches the data flows. What he sees is a concentration of risk that keeps risk managers like him awake at night.
Since November 2022, AI-linked companies have added a staggering $27 trillion in market value, a figure from Goldman Sachs research that is almost incomprehensible in scale. Nvidia’s ascent to a $5 trillion valuation is the most visible emblem of this surge. But as Schindler points out, the financial system has a bad habit of falling in love with the “latest darling of the markets.” The worry isn’t just about overvalued stocks. It’s about how the entire financial plumbing is now wired into a handful of these tech titans.
The real danger, in the view of the FSB, lies in the hidden connections. Hedge funds, chasing returns, may be using heavy leverage to amplify their bets on AI. Banks, through various lending and derivative channels, have exposures that aren’t always clear on the surface. A significant price correction in a company like Nvidia wouldn’t just be a bad day for its shareholders. It could trigger margin calls, force liquidations, and create a cascading shock through the non-bank financial sector – a sector that is now far larger and less regulated than it was in 2008.
This comes at a time when policymakers in both Europe and the U.K. are actively encouraging everyday citizens to move savings from cash into equity markets to spur economic growth. It’s a well-intentioned policy with a potentially nasty side effect. Individuals with little understanding of stocks and shares, as the report notes, are being nudged into a market that may be at its most risky and technically complex point in a generation. They are the “mom and pop” investors Schindler references. If they are simply buying a few shares, the systemic risk is low. But if, enticed by the promise of easy gains, they begin to use leverage – borrowing money to magnify their bets – the potential for personal and broader financial damage multiplies.
There are already flickering signs that the AI euphoria is facing a reality check. Recent weeks have seen sharp sell-offs in chip stocks, and the spectacular IPO of Elon Musk’s SpaceX, framed heavily as an AI play, has tumbled from its initial highs. The fundamental questions are getting louder: Where are the massive productivity gains? Where are the profits to justify these valuations? The Bank for International Settlements, often called the central bank for central banks, warns of a “protracted investment bust” if AI returns disappoint. The International Monetary Fund echoes this, cautioning that unmet expectations could lead to a severe market contraction.
Andrew Bailey, the Governor of the Bank of England who also chairs the FSB, has repeatedly voiced concerns about a potential AI price correction. Schindler, in his interview, adopts the measured tone of a regulator whose job is to worry. “Our job is to think about all the things that can go wrong,” he says, downplaying alarm while emphasizing vigilance. When asked if the financial system has enough safeguards to withstand an AI bubble popping, his answer is tellingly cautious: “I do hope so.”
That faint hope is not entirely reassuring. It acknowledges that while banks are more resilient than in 2008, the ecosystem of shadow banks, private funds, and leveraged investors is a vast, opaque wilderness. “There could be build-ups of risk in parts of that sector that it’s harder for us to assess,” Schindler admits. “So, I can’t say it will all be fine.”
The lesson from history is not that AI is a fad. It is transformative. The lesson is that finance has a unique talent for taking a genuine technological revolution and inflating it into a dangerous speculative bubble. The ingredients are all here:
- Stratospheric valuations
- Concentrated bets
- Rampant leverage
- Influx of novice investors
- Hidden connections
- Potential systemic risk
| Concern | Description |
|---|---|
| Market Value Surge | AI-linked companies added $27 trillion since Nov 2022 |
| Nvidia Valuation | Nvidia reached a $5 trillion valuation |
| Hedge Funds | Using heavy leverage to amplify bets on AI |
| Policymaker Concerns | Pushing citizens to move savings into equity markets |
| Fragile Investor Base | Novice investors entering a complex market |
| Financial System Risks | Potential for a systemic crisis with hidden connections |
John Schindler and his colleagues in Basel are watching the gauges, listening for the strain in the pipes. The rest of us should be watching, too. The only thing more expensive than getting into a bubble early is getting out too late.
