Gary Gensler, the U.S. Securities and Exchange Commission Chair, says that unless AI is brought to heel, the technology may lead to a financial crash before the decade is out.
Gensler went on to add that an AI crash is “nearly unavoidable.”
An impending crash
Gary Gensler is predicting a financial crash before the decade is out if regulators don’t get to grips with artificial intelligence.
In an interview with the FT, Gensler said it was imperative that U.S. regulators act swiftly to avoid the disaster.
“It’s frankly a hard challenge,” Gensler said. “It’s a hard financial stability issue to address because most of our regulation is about individual institutions, individual banks, individual money market funds, and individual brokers; it’s just in the nature of what we do. And this is about a horizontal [matter whereby] many institutions might be relying on the same underlying base model or underlying data aggregator.”
Gensler predicts that if AI systems are powered by similar presuppositions, creating near-identical models, this will ultimately lead to negative feedback loops spiraling into disaster.
It happened before
Gensler’s prediction is reminiscent of the 2010 stock market flash crash. That crash knocked a trillion dollars off the market before immediately rebounding. Regulators later blamed high-frequency trading algorithms for the crash.
“It’s frankly a hard challenge,” Gensler said. “It’s a hard financial stability issue to address because most of our regulation is about individual institutions, individual banks, individual money market funds, and individual brokers; it’s just in the nature of what we do. And this is about a horizontal [matter whereby] many institutions might be relying on the same underlying base model or underlying data aggregator.”
In July, the SEC proposed a rule change to attempt to address potential conflicts in predictive data analytics, but Gensler says this is not enough.
Even with the rule change, “it still doesn’t get to this horizontal issue if everybody’s relying on a base model and the base model is sitting not at the broker dealer, but it’s sitting at one of the big tech companies.”
Gensler is raising the alarm with anyone who cares to listen to him: the Financial Stability Board, the Financial Stability Oversight Council, and now the media.
“I think it’s really a cross-regulator challenge,” he added.
It can happen again
Wall Street is not immune to the sudden surge in popularity of a new generation of AI tools, from market monitoring to automating account opening.
This adoption of AI is enough to give Chair Gensler the fear.
“I do think we will, in the future, have a financial crisis,” said Gensler. “In the after-action reports, people will say, ‘Aha! There was either one data aggregator or one model… we’ve relied on.”
Gensler went on to predict that the “economics of networks” will cause a crash by the late 2020s or early 2030s and that, on the current course, the crash is “nearly unavoidable.”
and then