Will A.I. Replicate The Dot Com Bubble Bursting, Or Will It Be Like Housing In 2008?

By John A. Tures, Professor of Political Science, LaGrange College

Is AI in a bubble? If so, is that artificial intelligence bubble about to burst? Everyone’s got a theory on that. To separate the wheat from the chaff, I go into two historical bubbles to look for similarities to the A.I. market to determine if (a) there’s a bubble emerging, and (b) if it is about to burst, and what could be the consequences, if that’s the case.

The Dot Com Bubble Bursts

As John Soat writes for Forbes magazine, 14 dot-coms paid two million dollars for 30 second ads. By 2002, the NASDAQ had plunged and many dot-coms like pets.com with the famous sock-puppet ads went belly up.

“[T]here was this thing called the internet, a wide-open cyber-territory ripe for exploitation. All you needed was a website, an ecommerce engine, and a distribution model. The product was almost secondary: books, groceries, pet food, whatever. What really mattered was mindshare, and that demanded a blitzkrieg business strategy.”

There were a lot of great ideas among the casualties: virtual delivery of groceries, social networking sites, digital currency, an early version of telehealth, and pets.com, of course. Why did they fail?

“Fueled by a fervor for Internet-based companies, equity markets experienced exponential growth, highlighted by the Nasdaq index skyrocketing from under 1,000 in 1995 to more than 5,000 by 2000,” writes Adam Hayes with Investopedia. “This speculation relied heavily on the promise of profitability rather than actual earnings, leading to a frenzy where investors overlooked traditional financial fundamentals. However, as 2000 ushered in a sobering reality of widespread overvaluation, the market suffered a dramatic correction. The Nasdaq plummeted dramatically from a peak of 5,048 on March 10, 2000, to 1,139.90 by Oct. 4, 2002—a staggering decline of 76.81%.”

Why did people overlook weak business plans? Perhaps there was a feeling that the Internet was somehow different. Or there was a FOMO factor, and the fear of missing out got the investors to throw money at something not everyone really digested how it actually all worked. Plus, there was a lot of spending on parties, but also attempts to “build brand” even if the market wasn’t there.

How The Housing Market Crashed: Did A Bubble Burst?

Everyone knows that sub-prime mortgages triggered the Great Recession, but not everyone knows why there was a bubble in the first place. According to Wharton School Real Estate Professor Susan Wachter “a primary mistake that fueled the housing bubble was the rush to lend money to homebuyers without regard for their ability to repay. As the mortgage finance market expanded, it attracted droves of new players with money to lend. “We had a trillion dollars more coming into the mortgage market in 2004, 2005 and 2006,” Wachter said. “That’s $3 trillion dollars going into mortgages that did not exist before — non-traditional mortgages, so-called NINJA mortgages (no income, no job, no assets). These were [offered] by new players, and they were funded by private-label mortgage-backed securities — a very small, niche part of the market that expanded to more than 50% of the market at the peak in 2006.”

When people who couldn’t afford to pay these mortgages were in trouble, the market went bust. Investors expected the government to bail out everyone if necessary, but too much was going on at once. When the government didn’t help Lehman Brothers, it was the signal that the policy of moral hazard would not work in 2008, triggering the panic. AIG was almost the next casualty and the economic crunch of 2007-2009 was on.

“Lessons from those experiences are relevant to current market conditions,” Wachter’s colleague Benjamin Keys said. “We need to keep a close eye right now on this tradeoff between access and risk,” he said, referring to lending standards in particular. He noted that a “huge explosion of lending” occurred between late 2003 and 2006, driven by low interest rates.”

Is Artificial Intelligence Following The Footsteps Of Dot Coms and Subprime Mortgages?

Like the Dot.com Bubble and Housing Bubble, a lot of money is rushing into the artificial intelligence market, which is why people are drawing comparisons between the events. But there are some differences between the two and A.I.

“AI has helped drive valuations for both the S&P 500 and technology stocks within this index above the historical average, even though each remains below the extremes of the late 1990s dot-com bubble,” notes Adu Gaggar, both VPs for Capital Market Strategy, both writing for Fidelity. “To date, companies have funded their AI-related capital expenditures almost entirely from earnings rather than debt, a sign that it is likely not extreme or increasing the risk of systemic financial strain.”

That’s the good news. But there’s still some bad news. There’s this misperception that “A.I. is good and employees are bad,” and the latter has been shed in favor of the former, a huge mistake in understanding what the technology is and what it can do. It seems better designed to complement than replace humans. And evidence has shown the shortcomings of that approach.

“Indeed, despite the widespread initial footprint, when it comes to industrial impacts, the Massachusetts Institute of Technology’s (MIT’s) enterprise AI research found that fewer than 5% of organizations deploying AI saw significant measurable return on investment (ROI),” writes Chris Wiles with powermag.com.

A.I. isn’t going away, any more than the Internet, companies that end in .com, and houses. But for it to be successful, it should be integrated with humans. Companies that shed major numbers of employees on the A.I. overhyped dream are having to hire them back. Recognizing the limits of the technology, and the potential for it when paired with humans, could not only lower the bubble impact, but keep it from bursting.

John A. Tures is a professor of political science at LaGrange Collegein LaGrange, Georgia. His views are his own. He can be reached at jtures@lagrange.eduor on “X” at @johntures2. His first book “Branded” a thriller novel, has been published by the Huntsville Independent Press (https://www.huntsvilleindependent.com/product-page/branded).