The AI bailout could be baked into the AI bubble

From the article:

A hedge fund worth $45 billion at its height sold nearly its entire stock portfolio to Citadel Securities last week. As recently as a month ago, the fund was up 439 percent on the year, according to an investor letter from its founder, 24-year-old former OpenAI employee Leopold Aschenbrenner. But its portfolio, aggressively invested in companies tied to the artificial intelligence industry, dropped 67 percent in July.

Hilariously, the fund was called Situational Awareness.

Last week, the tech-heavy Nasdaq saw its second correction of the year, named for a drop of at least 10 percent from its peak. SpaceX has lost the equivalent of the entire value of Tesla since its post-IPO high in June, and it’s still dropping. For whatever reason—the rise of cheaper and more flexible Chinese AI models, the recognition that U.S. AI companies simply aren’t generating enough revenue to justify skyrocketing capital expenditures, the general economic drag from Trump’s tariffs and wars, or the increasingly operatic financial maneuvers to keep the wheels moving—the shine is way off the AI rose for investors.

The problem is that the industry is bound so tightly with the stock market that a change in feeling from AI investors could be all it takes to generate a market-wide crash, as we’re seeing to some degree. In other words, if AI is propping up the economy, who is propping up AI?

The answer, extrapolating from a fascinating new paper about private credit and the life insurance industry, could be the U.S. taxpayer.

I don't know how to express the rage and disgust I feel at this. If anyone recalls, economists across the political spectrum bleated about "moral hazard" in 2008 when it came to bailing out underwater homeowners.

The buried financial toxic waste from the AI boom is going to impair the U.S. even worse than the 2008 crisis, with global ramifications again. Its citizenry will be left to clean up while the usual suspects get even more wealthy.

For once, this can't be laid at the Trump administration's feet exclusively, though it certainly won't help. Private equity firms have been engineering their ability to take profits at public expense without regulation for decades.