Professor Joao Gomes, Wharton’s Senior Vice Dean of Research, Centers, and Academic Initiatives, recently joined Knowledge at Wharton‘s This Week in Business podcast to discuss the accelerating investment in artificial intelligence. He argues that policymakers should look beyond inflation and pay closer attention to how the boom is being financed.
AI has the potential to transform productivity and economic growth tremendously. But realizing this potential requires an enormous amount of capital. According to Professor Gomes, understanding where that investment comes from and where the resulting risks appear should be the Federal Reserve’s priority.
In Knowledge at Wharton, Professor Gomes expands on an argument he made in a recent Fortune op-ed: the Fed’s focus on inflation could overlook both the long-term economic potential and the financial vulnerabilities that are developing around the investment of AI.
“We need to entertain the thought that there are moments where, yeah, you disrupt the capital accumulation process, you disrupt investment, you disrupt financing that could really measurably affect the long-term standard of living here,” he explains.
At the same time, Professor Gomes points out that the Fed sees less data on some of the more opaque forms of financing behind AI investment, such as private credit. The concern is that policymakers might not entirely understand where leverage and risk are accumulating behind the scenes.
We can find similarities and differences in recent economic history. The collapse of the internet boom in the early 2000s resulted in significant losses for investors, but much of the financing occurred through transparent public markets and did not spill over into the rest of the economy. But Professor Gomes notes that in the lead-up to the 2008 financial crisis, policymakers failed to fully understand the complexity and interconnectedness of mortgage finance: “We have no sense of whether things are being priced correctly or not, whether the risks are being allocated the right way. And that smells a lot like 2006, 2007.”
For Professor Gomes, financial stability deserves greater prominence alongside price stability in the Fed’s framework, especially as we continue to weigh the risks and rewards of AI.
As he emphasizes in Fortune, “The Fed needs a much better understanding of how the investment is being financed: the growing role of private markets, increasingly complex links among borrowers and intermediaries, and where leverage, maturity risk and ultimate exposures actually reside. It needs better data and better models of how losses could propagate if expected revenues disappoint or today’s expensive computing capital becomes obsolete faster than anticipated.”
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Read Professor Gomes’ op-ed paywall-free in Yahoo Finance